By Shannon P. Pratt
Praise for Cost of Capital, Fourth Edition
"This publication is the main incisive and exhaustive therapy of this severe topic to date."
—From the Foreword by means of Stephen P. Lamb, Esq., companion, Paul, Weiss, Rifkind, Wharton & Garrison LLP, and previous vice chancellor, Delaware court docket of Chancery
"Cost of Capital, Fourth version treats either the idea and the sensible functions from the view of company administration and traders. It comprises in-depth information to help company executives and their staffs in estimating price of capital like no different e-book does. This ebook will serve company practitioners as a entire reference e-book in this not easy subject in those such a lot not easy monetary times."
—Robert L. Parkinson Jr., Chairman and leader government workplace, Baxter foreign Inc., and previous dean, institution of commercial management and Graduate tuition of commercial, Loyola college of Chicago
"Shannon Pratt and Roger Grabowski have consolidated details on either the theoretical framework and the sensible purposes wanted through company executives and their staffs in estimating rate of capital in those ever-changing monetary occasions. It presents tips to help company practitioners from the company administration viewpoint. for instance, the discussions on measuring debt ability is principally well timed during this altering credits industry setting. The booklet serves company practitioners as a superb reference."
—Franco Baseotto, govt vp, leader monetary Officer, and Treasurer, Foster Wheeler AG
"When computing the price of capital for a company, it may be rather stated that for each rule, there are 100 exceptions. Shannon Pratt and Roger Grabowski may be credited with not just defining the fundamental ideas that govern the computation of the price of capital, but in addition a highway map to navigate throughout the thousands of exceptions. This belongs in each practitioner's selection of must-have valuation books."
—Aswath Damodaran, Professor, Stern university of commercial, long island University
"Pratt and Grabowski have performed it back. simply for those who inspiration they could not almost certainly do a greater task, they did. price of Capital, Fourth version is a great source. it's surely the main complete publication in this topic this present day. What particularly distinguishes this e-book from different such texts is the truth that possible read—no small feat given the exhaustive and targeted learn and intricate subject material. This booklet makes you think that tough approximately the entire replacement perspectives available in the market and is helping circulation the valuation occupation forward."
—James R. Hitchner, CPA/ABV/CFF, ASA, handling Director, monetary Valuation Advisors; CEO, Valuation services and products; Editor in leader, Financial Valuation and Litigation Expert; and President, monetary Consulting Group
"The Fourth variation of Cost of Capital is still a 'one-stop store' for history and present pondering at the improvement and makes use of of charges of go back on capital. whereas it's going to have an attraction for a wide selection of parts, it may function required studying and as a reference quantity for college students of finance and practitioners of industrial valuation. Readers will proceed to discover the quantity to be a fantastic origin for persisted debate and examine at the subject for a few years to come."
—Anthony V. Aaron, Americas chief, caliber and hazard administration, Ernst & younger Transaction Advisory companies
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Extra info for Cost of Capital: Applications and Examples
The relationship between risk and the cost of capital is the subject of Chapter 5. 1 is valuing a bond for which a risk rating has been estimated. Let us make five assumptions: 1. The bond has a face value of $1,000. 2. It pays 8% interest on its face value. 3. The bond pays interest once a year, at the end of the year. (This, of course, is a simplifying assumption. ) 4. The bond matures exactly three years from the valuation date. 5. , total rate of return, including interest payments and price appreciation) for bonds of the same risk grade and maturity as the subject bond is 10%.
Fair value is typically the applicable standard of value in fairness and shareholder disputes and is defined by state statute and court interpretations. In the United States, the most widely recognized and accepted standard of value related to real estate appraisals is market value. Investment value is the specific value of an investment to a particular investor or class of investors based on individual investment requirements. Intrinsic value (sometimes called fundamental value) is the specific value of an investment based on its perceived characteristics inherent in the investment but not based on the value to any one investor or class of investors.
The most popular focus of contemporary corporate finance is that companies should be making investments, either capital investments or acquisitions, from which the returns will exceed the cost of capital for that investment. 9 COST OF CAPITAL IS FORWARD-LOOKING The cost of capital represents investors’ expectations. There are three elements to these expectations: 1. The risk-free rate, which includes: & Rental rate. A real return for lending the funds risk-free, thus forgoing consumption for which the funds otherwise could be used.