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

CHAPTER 43

Cost of Capital for a Smaller-Sized Company¹

Case Background

Valuation Procedures

Cost of Equity Capital

Build-up Method (Using Morningstar Data)

Build-up Method (Using Duff & Phelps Data)

Modified CAPM (Using Morningstar Data)

Modified CAPM (Using Duff & Phelps Data)

Reconciliation

Conclusion

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

CASE BACKGROUND

This example is a valuation of a 100% controlling ownership interest in a packaging supply company for buy/sell purposes. The valuation date was as of December 31, 2011. The standard of value was fair market value.

Packaging Supply, Inc., was based in New York City with branches in Springfield, New Jersey, and Yonkers, New York. While free of the regulatory constrictions facing ABCOpCoas described in Chapter 42, relocating Packaging Supply, Inc., was similarly limited since the company's customers were concentrated within a 100-mile radius of New York City. The company faced significant competition in the region, but had strong, experienced management, a diversified supply chain, and a history of leveraging its assets to successfully compete in the marketplace. Packaging Supply, Inc., was organized as a C corporation and had a long history of profitable operations.

In this chapter, we will detail key valuation concepts and demonstrate the cost of equity and cost of equity premium computations using Morningstar and Duff & Phelps data.

VALUATION PROCEDURES

We first employed the discounted cash ...