Reading 15
Cost of Capital: Advanced Topics
2 modules 21 min
0/2
Exam Focus
This reading focuses on estimation of companies’ cost of capital. Understand the qualitative factors that influence the risk premiums on debt and equity, and how equity risk premium is calculated based on historical data or on forward looking estimates. Finally, understand the complications involved in estimating the cost of capital for privately held and international companies.
Warm Up: Weighted Average Cost of Capital
The weighted average cost of capital (WACC) for a company is calculated as:
We consider the after tax cost of debt if the interest expense is tax deductible (using the marginal tax rate for the company).
Modules
- Module 15.1Factors Affecting the Cost of Capital and the Cost of DebtExplain top down and bottom up factors that impact the cost of capital. · Compare methods used to estimate the cost of debt. · Estimate the cost of debt or required return on equity for a public company and a private company.7 min · 3 LOS
- Module 15.2ERP and the Cost of EquityExplain historical and forward looking approaches to estimating an equity risk premium. · Compare methods used to estimate the required return on equity. · Estimate the cost of debt or required return on equity for a public company and a private company. · Evaluate a company’s capital structure and cost of capital relative to peers.14 min · 4 LOS