An introduction to the cost of capital

Ignacio Velez-Pareja (ignaciovelezpareja@gmail.com) and Joseph Tham (thamjx@duke.edu)

No 6854, Proyecciones Financieras y Valoración from Master Consultores

Abstract: This chapter is devoted to the definition and application of the cost of capital"concept to the valuation of cash flows from different points of view. We present an approach to estimate the cost of debt and general formulations for the cost of equity and the traditional weighted average cost of capital WACC, for the free cash flow, FCF and the non-traditional capital cash flow, CCF. We explain in detail the traditional textbook formula for the WACC with respect to the CCF and FCF. We demonstrate the solution of the circularity problem between the WACC andthe value of the cash flow. At the end of the chapter we present some questions to encourage the reader to have further insights to the subject."

Keywords: Cost of capital; weighted average cost of capital; cost of levered equity; taxsavings (search for similar items in EconPapers)
JEL-codes: E47 G12 G30 G31 (search for similar items in EconPapers)
Pages: 26
Date: 2010-03-28
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:006854

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