That was the cry of one attendee at the NACVA conference in Salt Lake City during a session titled “The Cost of Capital Conundrum.” Indeed, the term “conundrum” is fitting to describe a process that has evolved from a relatively simple exercise into an exceedingly complex procedure with multiple options. During the session, audience members had difficulty grasping some of the concepts such as the use of regression equations for the size premium and, particularly, the notion of levering, unlevering—and then relevering—the cost of capital. The attendee who was at his wits’ end asked the panel why we need all of these options and complexity. It’s a more complex world today, the panel explained, and better to consider many options instead of just one. But some wonder whether all of this has gotten out of control and it is all just an illusion of precision.
Simpler way: During the session, the panel mentioned different methodologies and tools available to estimate the cost of capital but overlooked a new choice: BVR’s Cost of Capital Professional online platform, which provides a simple and transparent way to estimate cost of capital with data similar to the original Ibbotson SBBI data. The platform recently added two sources of industry betas to help in estimating the industry risk premium (IRP) component of the buildup method.
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