Cost of Capital: Applications and Examples, + Website, 5th Edition

Foreword

The opportunity cost of capital is one of the most important concepts in finance. For example, if you are a chief financial officer contemplating a possible capital expenditure, you need to know what return you should look to earn from the investment. If you are an investor who needs to plan for future expenditures, you need to ask what return you can expect to earn on your portfolio.

Shannon Pratt and Roger Grabowski have produced a remarkably comprehensive review of the subject. With over 1,000 pages of close-packed material, the book is not for bedtime reading, but it is a work that valuation practitioners, CFOs, and others will find an invaluable reference.

The book is somewhat wider ranging than its title suggests, for its focus is on valuation. It does not simply discuss how to estimate the cost of capital, but also shows how this estimate can be used to solve a variety of valuation problems. Indeed, it is here that the book makes some of its most useful contributions. Most finance texts provide an overview of how the cost of capital can be used to discount the expected cash flows from a proposed capital project. What I find most interesting about this book is that it also tackles much less well covered topics. For example, boards of securities firms that need to value level 3 securities will find useful advice on illiquidity discounts. Practitioners who need to estimate the value of control will find a chapter on this issue. And so on. It is this all-embracing nature ...