Cost of Capital: Estimation and Applications

Cost of capital estimation has long been recognized as the most critical element in business valuation, capital budgeting, feasibility studies, and corporate finance decisions. It is also the most difficult procedure to perform and assess. In Cost of Capital: Estimation and Applications, renowned author and valuation expert Shannon Pratt addresses the most controversial issues and thorny problems in estimating the cost of capital. In a clear, concise, and easily understandable manner, he tackles all of the problems in calculating rates of return, and offers sensible, well-thought-out solutions that apply to small business and midsize companies as well as multibillion-dollar corporations.

Dr. Pratt lays out the basic tools that anyone can use immediately when estimating cost of capital or reviewing someone else's estimate. He presents basic theory and explains how it is used in valuation of businesses and business assets, as well as in capital expenditure decision making; and he provides clear explanations for each of the mathematical formulas used. Citing comprehensive sources of information, Pratt also offers clear and complete definitions of all common terminology used in cost of capital estimation. He points out the errors that are common to the process and gives practical advice on how to avoid them when making an estimation and identify them in other people's work. This remarkable book:

• Describes the development of discount and capitalization rates
• Offers in-depth coverage of valuation and corporate finance applications
• Provides needed data for borrowing money
• Supplies user-friendly models for applications in all contexts.

Cost of Capital combines a state-of-the-art treatise on cost of capital estimation with an accessible introduction for the nonprofessional. It begins with an exposition of basic concepts understandable to the layman and proceeds gradually from simple applications to the more complex procedures commonly found in the marketplace. Generously supplemented with tables, graphical diagrams, and step-by-step examples, this book is an indispensable resource for business appraisers, valuation professionals, consultants attached to accounting firms, and executives who must make important decisions based on their understanding of cost of capital estimations.