A Firm's Cost of Capital

Binying Liu, Iwan Meier, José Liberti () and Ravi Jagannathan
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Binying Liu: Department of Finance, Hong Kong University of Science and Technology, Hong Kong
Iwan Meier: Department of Finance, HEC Montréal, Montréal, Québec H3T 2A7, Canada
José Liberti: Kellogg School of Management, Northwestern University, Evanston, Illinois 60208

Annual Review of Financial Economics, 2017, vol. 9, issue 1, 259-282

Abstract: To create value, a firm must invest in projects that provide a return greater than the cost of capital. The cost of capital is not observed and its estimation requires assumptions on investors? consumption, savings, and portfolio decisions. We review the academic literature on firms? cost of financial capital and the estimation of the different components: cost of equity, cost of debt, and their relative weights. We also review various approaches to estimating the cost of capital and the assumptions justifying these approaches.

Keywords: capital structure; cost of capital; cost of debt; cost of equity; divisional cost of capital; weighted average cost of capital (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2017
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