Estimation of cost of capital


The cost of capital is generally the weighted average cost of capital. The weighted average cost of capital is the weighted averages of cost of equity and cost of debt. Risk-free rate and risk premium are two major building blocks for the calculation of cost of equity. Financial analysts use yield-to-maturity of different bonds based on the period of valuation. The yield on long-term treasury bond can be used as risk-free rate. The determination of risk premium is an important step in the calculation of the cost of equity. The equity risk premium is generally estimated as the difference between the average annual equity index returns and the average return on treasury bonds. Beta can be estimated through ...

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