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Investing in REITs: Real Estate Investment Trusts, 4th Edition by Ralph L. Block

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APPENDIX C

Cost of Equity Capital

Important as the concept is, there seems to be no general consensus on how to calculate a REIT's “cost of equity capital.” There are, however, several ways to approach this issue. One quick way to determine a REIT's nominal equity capital cost is to estimate the REIT's expected per-share FFO for the next 12 months. When issuing new equity, this per-share FFO should be adjusted for the new shares being issued and the expected incremental FFO to be earned from the investment of the proceeds from such new share issuance (or interest costs saved from the pay-down of debt). Finally, we would then divide such “pro forma” FFO per share by the price the REIT receives for each new share sold.1

Let's assume, for example, ...

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