New guide to industry cost of capital includes latest model

BVWireIssue #154-3
BVWireIssue #154-3
June 24, 2015

The recently released 2015 edition of the Valuation Handbook - Industry Cost of Capital includes eight different estimates of the cost of capital for 200 different industries. What’s new in this edition is the replacement of one of the estimates.

Five-factor model: The Fama-French five-factor model has replaced the Fama-French three-factor model. Recent research by Fama and French shows that the degree of a firm’s profitability and reinvestment are two additional factors that have an effect on equity returns and thus have a role in explaining cost of capital. The five-factor model is now included in the book’s eight cost of equity capital estimates, which are:

  • CAPM;
  • CAPM plus size premium (using the CRSP Deciles Size Study);
  • Build-up plus industry risk premium;
  • CAPM plus size premium (using the risk premium report study);
  • Build-up plus risk premium over the risk-free rate (using the risk premium report study);
  • One-stage DCF model;
  • Three-stage DCF model; and
  • Fama-French five-factor model.

The 2015 Valuation Handbook - Industry Cost of Capital is used to determine an industry-level cost of capital and is not a replacement for the individual company cost of capital determined using the 2015 Valuation Handbook - Guide to Cost of Capital. Instead, this book is used as a companion volume to fine-tune company cost of capital with the industry information included in this volume.

For more information on this book, visit BVR’s Cost of Capital Resource Center, where you’ll also find the latest valuation data and analysis—including articles and webinars that are available at no charge.

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