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

Preface

Cost of capital is an essential, albeit complex element of virtually every application of finance. Literally billions and billions of dollars turn on decisions regarding the cost of capital in each of the following contexts:

• Mergers and acquisitions
• Shareholder disputes
• Capital budgeting
• Bankruptcies and reorganizations
• Business damages cases
• Gift, estate, and income tax matters
• Marital property settlements
• Ratemaking in regulated industries
• Property taxation

This book addresses developments related to estimating the cost of capital in all of these contexts. We use the term estimates rather than determinations because the cost of capital is forward-looking. It is the expected rate of return required to attract capital to a particular investment or project as of a given date, reflecting economic and other factors surrounding the expected returns and the risk of the investment or project at that particular point in time.

Cost of capital is the pricing of risk. Since risk is in the mind of the beholder, it cannot be measured directly. This book addresses ways to measure risk to lead to an estimate of the appropriate cost of capital.

EFFECT OF FEDERAL RESERVE ACTIONS ON LONG-TERM INTEREST RATES

Federal Reserve actions kept long-term interest rates low from 1942 through 1951 and again from the fall of 2011 through at least the writing of this book. We analyze the effect of these actions on the traditional data and procedures used to estimate the cost of capital, and suggest ...