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Practical approach to estimating cost of capital

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  • Skardziukas, Domantas

Abstract

The recent as well as precedent market crashes has increased a number of already existing biases when estimating a forward looking cost of capital for company’s stakeholders. With cost of capital being essential in corporate valuation and decision making the following paper analyzes the research carried out by numerous academics up to date and provides a comprehensive overview on the appropriate choices of inputs and methods for estimating cost of capital. The paper draws the necessary attention to the times of crises. An additional study shows how different preferences can result in variation in cost of equity capital and terminal value of a company.

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File URL: http://mpra.ub.uni-muenchen.de/31011/
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File URL: http://mpra.ub.uni-muenchen.de/31325/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 31011.

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Date of creation: 01 Oct 2010
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Handle: RePEc:pra:mprapa:31011

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Keywords: corporate finance; valuation; cost of capital; beta; recession; credit crunch; cost of equity;

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  1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
  2. Daniel C. Indro & Wayne Y. Lee, 1997. "Biases in Arithmetic and Geometric Averages as Estimates of Long-Run Expected Returns and Risk Premia," Financial Management, Financial Management Association, vol. 26(4), Winter.
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