An Introduction to the Cost of Capital
27 Pages Posted: 22 Mar 2010 Last revised: 12 Dec 2015
There are 2 versions of this paper
An Introduction to the Cost of Capital
Una Introducción Al Costo De Capital (An Introduction to the Cost of Capital)
Date Written: March 14, 2010
Abstract
The Spanish version of this paper can be found at http://ssrn.com/abstract=1997065
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 and the 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, Tax Savings
JEL Classification: E47, G12, G31, G30
Suggested Citation: Suggested Citation
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