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An introduction to the cost of capital

Author

Listed:
  • Ignacio Velez-Pareja
  • Joseph Tham

Abstract

This chapter is devoted to the definition and application of the cost of capital"concept to the valuation of cash flows from different points of view. We present an approach to estimate the cost of debt and general formulations for the cost of equity and the traditional weighted average cost of capital WACC, for the free cash flow, FCF and the non-traditional capital cash flow, CCF. We explain in detail the traditional textbook formula for the WACC with respect to the CCF and FCF. We demonstrate the solution of the circularity problem between the WACC andthe value of the cash flow. At the end of the chapter we present some questions to encourage the reader to have further insights to the subject."

Suggested Citation

  • Ignacio Velez-Pareja & Joseph Tham, 2010. "An introduction to the cost of capital," Proyecciones Financieras y Valoración 6854, Master Consultores.
    • Handle: RePEc:col:000463:006854
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    File URL: http://ssrn.com/abstract=1570718
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    More about this item

    Keywords

    Cost of capital; weighted average cost of capital; cost of levered equity; taxsavings;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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