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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.

Suggested Citation

  • Skardziukas, Domantas, 2010. "Practical approach to estimating cost of capital," MPRA Paper 31011, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:31011
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    File URL: https://mpra.ub.uni-muenchen.de/31011/1/MPRA_paper_31011.pdf
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    File URL: https://mpra.ub.uni-muenchen.de/31325/1/MPRA_paper_31325.pdf
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    References listed on IDEAS

    as
    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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    Cited by:

    1. Schmitt, Stephan & Neu, Werner, 2017. "The beta in the WACC for regulated fixed and mobile telecommunica-tions services: Its role and robust estimation," 28th European Regional ITS Conference, Passau 2017 169496, International Telecommunications Society (ITS).

    More about this item

    Keywords

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

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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