Cost of Capital

As was discussed in Chapter 7, valuation of a company requires knowledge of the cost of capital. Cost of capital is the opportunity cost a company incurs to secure funds for investment. From an investor’s point of view, cost of capital is that rate of return on investment, which makes the discounted stream of future earnings equal to the supply price of the asset. This chapter is concerned with the meaning and method of estimating the cost of capital.

Estimating cost of capital requires calculation of the components of the cost of capital: equity, debt, and preferred stocks. We discuss the components and methods of calculating them next.

Cost of Equity

To calculate the cost of equity or required rate of return on the ...

Get Global Mergers and Acquisitions, 2nd Edition now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.