## Cost of Capital: Applications and Examples PLUS Website, Fifth Edition

April 2014 978-1-118-55580-4 Hardcover (1,311 pages)

Roger Grabowski, Shannon Pratt

John Wiley & Sons, Inc.

*Cost of Capital*contains expanded materials on estimating the basic building blocks of the cost of equity capital, the risk-free rate, and equity risk premium. There is also discussion of the volatility created by the financial crisis in 2008, the subsequent recession and uncertain recovery, and how those events have fundamentally changed how we need to interpret the inputs to the models we use to develop these estimates.

The book includes new case studies providing comprehensive discussion of cost of capital estimates for valuing a business and damages calculations for small and medium-sized businesses, cross-referenced to the chapters covering the theory and data.

- Addresses equity risk premium and the risk-free rate, including the impact of Federal Reserve actions
- Discusses the global cost of capital estimation, including a new size study of European countries

*Cost of Capital, Fifth Edition* puts an emphasis on practical application. To that end, this updated edition provides readers with exclusive access to a companion website filled with supplementary materials, allowing you to continue to learn in a hands-on fashion long after closing the book.

**Table of Contents**

About the Authors

Foreword

Preface

Acknowledgments

**Part One: Cost of Capital Basics **

CHAPTER 1: Defining Cost of Capital

CHAPTER 2: Introduction to Cost of Capital Applications: Valuation, Project Selection, and Ratemaking

CHAPTER 3: Net Cash Flow: The Preferred Measure of Economic Income

APPENDIX 3A: Alternative Measures of Economic Income

CHAPTER 4: Discounting versus Capitalizing

APPENDIX 4A: Equivalency of Capitalizing Residual Income

CHAPTER 5: Discounting—Beyond the Basics

CHAPTER 6: Relationship between Risk and the Cost of Capital

**Part Two: Estimating the Cost of Equity Capital **

CHAPTER 7: Risk-free Rate

CHAPTER 8: Equity Risk Premium

APPENDIX 8A: Deriving ERP Estimates

APPENDIX 8B: Other Sources of ERP Estimates

CHAPTER 9: Build-up Method

CHAPTER 10: Capital Asset Pricing Model

CHAPTER 11: Beta: Differing Definitions and Estimates

APPENDIX 11A: Examples of Computing OLS Beta, Sum Beta, and Full-information Beta Estimates

APPENDIX 11B: Estimating Beta: Interpreting Regression Statistics

CHAPTER 12: Unlevering and Levering Equity Betas

CHAPTER 13: Criticism of CAPM and Beta versus Other Risk Measures

APPENDIX 13A: Example of Computing Downside Beta Estimates

CHAPTER 14: Size Effect

CHAPTER 15: Criticisms of the Size Effect

APPENDIX 15A: Other Data Issues Regarding the Size Effect

CHAPTER 16: Company-specific Risk

CHAPTER 17: Distressed Businesses

APPENDIX 17A: Cost of Capital and the Valuation of Worthless Stock

CHAPTER 18: Other Methods of Estimating the Cost of Equity Capital

CHAPTER 19: Using the Duff & Phelps Risk Premium Report Data

APPENDIX 19A: Examples Using the Duff & Phelps Risk Premium Report Data

**Part Three: Estimating the Overall Cost of Capital **

CHAPTER 20: Other Components of a Business's Capital Structure

CHAPTER 21: Weighted Average Cost of Capital

APPENDIX 21A: Iterative Process Using CAPM to Calculate the Cost of Equity Component of the Weighted Average Cost of Capital

**Part Four: Estimating the Cost of Capital—Non-Freely Traded Interests**

CHAPTER 22: Handling Discounts for Lack of Marketability and Liquidity for Minority Interests in Operating Businesses

CHAPTER 23: Cost of Capital of Family Holding Company Interests

CHAPTER 24: The Private Company Discount for Operating Businesses

CHAPTER 25: Cost of Capital of Interests in Pass-through Entities

CHAPTER 26: Relationship between Risk and Returns in Venture Capital and Private Equity Investments

CHAPTER 27: Cost of Capital for Closely Held Businesses 693

**Part Five: Corporate Finance Officers: Using Cost of Capital Data **

CHAPTER 28: Capital Budgeting and Feasibility Studies

CHAPTER 29: Cost of Capital for Divisions and Reporting Units

CHAPTER 30: Cost of Capital for Fair Value Reporting of Intangible Assets

CHAPTER 31: Cost of Capital in Evaluating Mergers and Acquisitions

CHAPTER 32: Cost of Capital in Transfer Pricing

APPENDIX 32A: Cost of Capital in Transfer Pricing Example

CHAPTER 33: The Role of the Cost of Capital in EVA and in Corporate Value-Based Management

**Part Six: Other Cost of Capital Considerations**

CHAPTER 34: Estimating Economic Income

CHAPTER 35: Minority versus Control Implications of Cost of Capital Data

CHAPTER 36: How Cost of Capital Relates to the Excess Earnings Method of Valuation

CHAPTER 37: Adjusting the Discount Rate to Alternative Economic Income Measures

**Part Seven: Considerations in Special Applications **

CHAPTER 38: How Courts View Cost of Capital

CHAPTER 39: Global Cost of Capital Models

CHAPTER 40: Cost of Capital of Real Property—Individual Assets

APPENDIX 40A: Valuing Real Property

CHAPTER 41: Cost of Capital of Real Estate Entities

APPENDIX 41A: Valuing Real Estate Entities

**Part Eight: Case Studies**

CHAPTER 42: Cost of Capital for a Mid-Sized Company

APPENDIX 42A: Report for Cost of Capital for a Mid-Sized Company

CHAPTER 43: Cost of Capital for a Smaller-Sized Company

APPENDIX 43A: Report for Cost of Capital for a Smaller-Sized Company

**Part Nine: Advice to Practitioners **

CHAPTER 44: Common Errors in Estimation and Use of Cost of Capital

CHAPTER 45: Advice on Dealing with Cost of Capital Issues

APPENDIX I: Bibliography

APPENDIX II: Data Resources

APPENDIX III: Glossary of Cost of Capital Terms

About the Website

Index of Cases

Index