Cost of Capital : Applications and Examples.
Title:
Cost of Capital : Applications and Examples.
Author:
Pratt, Shannon P.
ISBN:
9780470886564
Personal Author:
Edition:
4th ed.
Physical Description:
1 online resource (832 pages)
Series:
Wiley Finance ; v.604
Wiley Finance
Contents:
Cost of Capital, Fourth Edition: Applications and Examples -- Contents -- About the Authors -- Foreword -- Preface -- Acknowledgments -- Notation System and Abbreviations Used in This Book -- Part One: Cost of Capital Basics -- Chapter 1: Defining Cost of Capital -- INTRODUCTION -- COMPONENTS OF A CAPITAL STRUCTURE -- COST OF CAPITAL IS A FUNCTION OF THE INVESTMENT -- COST OF CAPITAL IS FORWARD-LOOKING -- COST OF CAPITAL IS BASED ON MARKET VALUE -- COST OF CAPITAL IS USUALLY STATED IN NOMINAL TERMS -- COST OF CAPITAL EQUALS THE DISCOUNT RATE -- DISCOUNT RATE IS NOT THE SAME AS CAPITALIZATION RATE -- STANDARD OF VALUE -- SUMMARY -- Chapter 2: Introduction to Cost of Capital Applications: Valuation and Project Selection -- INTRODUCTION -- NET CASH FLOW IS THE PREFERRED ECONOMIC INCOME MEASURE -- COST OF CAPITAL IS THE PROPER DISCOUNT RATE -- PRESENT VALUE FORMULA -- EXAMPLE: VALUING A BOND -- APPLICATIONS TO BUSINESSES, BUSINESS INTERESTS, AND CAPITAL BUDGETING PROJECTS -- SUMMARY -- Chapter 3: Net Cash Flow: Preferred Measure of Economic Income -- INTRODUCTION -- DEFINING NET CASH FLOW -- NET CASH FLOWS SHOULD BE PROBABILITY-WEIGHTED EXPECTED VALUES -- WHY NET CASH FLOW IS THE PREFERRED MEASURE OF ECONOMIC INCOME -- ALTERNATIVE MEASURE OF ECONOMIC INCOME -- SUMMARY -- ADDITIONAL READING -- TECHNICAL SUPPLEMENT CHAPTER 1: ALTERNATIVE NET CASH FLOW DEFINITIONS -- Chapter 4: Discounting versus Capitalizing -- INTRODUCTION -- CAPITALIZATION FORMULA -- FUNCTIONAL RELATIONSHIP BETWEEN DISCOUNT RATE AND CAPITALIZATION RATE -- MAJOR DIFFERENCE BETWEEN DISCOUNTING AND CAPITALIZING -- CONSTANT GROWTH OR GORDON GROWTH MODEL -- COMBINING DISCOUNTING AND CAPITALIZING (TWO-STAGE MODEL) -- EQUIVALENCY OF DISCOUNTING AND CAPITALIZING MODELS -- MIDYEAR CONVENTION -- MATCHING PROJECTION PERIODS TO FINANCIAL STATEMENTS: PARTIAL FIRST YEAR.
EQUIVALENCY OF CAPITALIZING RESIDUAL INCOME -- SUMMARY -- Chapter 5: Relationship between Risk and the Cost of Capital -- INTRODUCTION -- DEFINING RISK -- HOW RISK AFFECTS THE COST OF CAPITAL -- FASB'S CONCEPTS STATEMENT NO. 7: CASH FLOWS AND PRESENT VALUE DISCOUNT RATES -- TYPES OF RISK -- MEASURING RISKINESS OF NET CASH FLOWS -- SUMMARY -- Chapter 6: Cost Components of a Business's Capital Structure -- INTRODUCTION -- DEBT CAPITAL -- PREFERRED EQUITY CAPITAL -- CONVERTIBLE DEBT AND CONVERTIBLE PREFERRED EQUITY CAPITAL -- QUALIFIED EQUITY ISSUED UNDER TARP -- EMPLOYEE STOCK OPTIONS -- COMMON EQUITY CAPITAL -- OBLIGATIONS THAT ARE SUBTRACTED I N A VALUATION -- SUMMARY -- Part Two: Estimating the Cost of Equity Capital and the Overall Cost of Capital -- Chapter 7: Build-up Method -- INTRODUCTION -- FORMULA FOR ESTIMATING THE COST OF EQUITY CAPITAL BY THE BUILD-UP METHOD -- EQUITY RISK PREMIUM -- SIZE PREMIUM -- COMPANY-SPECIFIC RISK PREMIUM -- EXAMPLE OF THE BUILD-UP METHOD USING MORNINGSTAR DATA -- EXAMPLE OF THE BUILD-UP METHOD USING DUFF & PHELPS SIZE STUDY DATA -- SUMMARY -- Chapter 8: Capital Asset Pricing Model -- INTRODUCTION -- CONCEPT OF MARKET OR SYSTEMATIC RISK -- BACKGROUND OF THE CAPITAL ASSET PRICING MODEL -- MARKET OR SYSTEMATIC AND UNIQUE OR UNSYSTEMATIC RISKS -- USING BETA TO ESTIMATE EXPECTED RATE OF RETURN -- EXPANDING CAPM TO INCORPORATE SIZE PREMIUM AND COMPANY-SPECIFIC RISK -- EXPANDED CAPM COST OF CAPITAL FORMULA -- EXAMPLES OF A CAPM MODEL -- ASSUMPTIONS UNDERLYING THE CAPITAL ASSET PRICING MODEL -- SUMMARY -- Chapter 9: Equity Risk Premium -- INTRODUCTION -- DEFINING THE EQUITY RISK PREMIUM -- WHICH RISK-FREE RATE TO USE IN ESTIMATING THE ERP -- REALIZED R ISK PREMIUM (EX POST) APPROACH -- CHANGES IN ECONOMICS THAT CAUSED UNEXPECTEDLY LARGE REALIZED RISK PREMIUMS -- OTHER SOURCES OF ERP ESTIMATES.
FORWARD-LOOKING (EX ANTE) APPROACHES -- LONG-TERM UNCONDITIONAL ERP ESTIMATE -- CONDITIONAL ESTIMATE OF ERP AND THE CRISIS OF 2008- 2010 -- SUMMARY -- Appendix 9A: Realized Risk Premium Approach and Other Sources of ERP Estimates -- Chapter 10: Beta: Differing Definitions and Estimates -- INTRODUCTION -- ESTIMATION OF EQUITY BETA -- DIFFERENCES IN ESTIMATION OF EQUITY BETAS -- MODIFIED BETAS: ADJUSTED, SMOOTHED, AND LAGGED -- ''FULL INFORMATION'' EQUITY BETA -- PEER GROUP EQUITY BETA -- FUNDAMENTAL EQUITY BETA -- EQUITY BETA ESTIMATION RESEARCH -- ESTIMATION OF DEBT BETAS -- OTHER BETA CONSIDERATIONS -- SUMMARY -- TECHNICAL SUPPLEMENT CHAPTERS 2 AND 3 -- Chapter 11: Unlevering and Levering Equity Betas -- INTRODUCTION -- FORMULAS FOR UNLEVERING AND LEVERING EQUITY BETAS -- CHOOSING AMONG UNLEVERING AND LEVERING FORMULAS -- ADJUSTING ASSET BETA ESTIMATES FOR DIFFERENCES IN OPERATING LEVERAGE -- ADJUSTING ASSET BETA ESTIMATES FOR EXCESS CASH AND INVESTMENTS -- UNLEVERING EQUITY VOLATILITY -- SUMMARY -- ADDITIONAL READING -- Chapter 12: Criticism of CAPM and Beta versus Other Risk Measures -- INTRODUCTION -- CAPM ASSUMPTIONS AND BETA AS A RISK MEASURE -- PROBLEMS WITH CAPM ASSUMPTIONS -- TESTING ASSET PRICING MODELS -- RISK MEASURES BEYOND BETA -- SUMMARY -- TECHNICAL SUPPLEMENT CHAPTER 4- EXAMPLE OF COMPUTING DOWNSIDE BETA ESTIMATES -- Chapter 13: Size Effect -- INTRODUCTION -- MORNINGSTAR STUDIES -- DUFF & PHELPS STUDIES -- ESTIMATING SIZE PREMIUMS FOR NONPUBLIC COMPANY -- SUMMARY -- Chapter 14: Criticisms of the Size Effect -- INTRODUCTION -- IS THE SIZE EFFECT THE RESULT OF INCORRECTLY MEASURING BETAS? -- COMPOSITION OF THE SMALLEST DECILE -- DATA ISSUES -- RISKS OF SMALL COMPANIES -- SHOULD THE COST OF EQUITY CAPITAL USE A CHANGING SIZE PREMIUM? -- RELATIONSHIP OF SIZE AND MEASURES OF RISK -- RELATIONSHIP OF SIZE AND LIQUIDITY -- SUMMARY.
Appendix 14A: Other Data Issues Regarding the Size Effect -- Chapter 15: Company-specific Risk -- INTRODUCTION -- MATCHING FUNDAMENTAL RISK AND RETURN-DUFF & PHELPS RISK STUDY -- MARKET PRICING OF COMPANY-SPECIFIC RISK -- COST TO CURE -- OTHER COMPANY-SPECIFIC FACTORS -- SUMMARY -- Chapter 16: Distressed Businesses -- INTRODUCTION -- WHAT IS DISTRESS? -- VALUING FIRMS IN DISTRESS -- BANKRUPTCY PREDICTION MODELS -- COST OF CAPITAL FOR DISTRESSED FIRMS -- VALUING COMPANIES EMERGING FROM BANKRUPTCY -- COST OF DISTRESS -- SUMMARY -- ADDITIONAL READING -- TECHNICAL SUPPLEMENT CHAPTER 7: COST OF CAPITAL AND THE VALUATION OF WORTHLESS STOCK -- Chapter 17: Other Methods of Estimating the Cost of Equity Capital -- INTRODUCTION -- FAMA-FRENCH THREE-FACTOR MODEL -- ARBITRAGE PRICING THEORY -- COMPARING MODELS -- MARKET-DERIVED CAPITAL PRICING MODEL -- YIELD SPREAD MODEL -- IMPLIED COST OF EQUITY CAPITAL -- USING ANALYST FORECASTS -- SOURCES OF INFORMATION -- SUMMARY -- ADDITIONAL READING -- TECHNICAL SUPPLEMENT APPENDIX I -- Chapter 18: Weighted Average Cost of Capital -- INTRODUCTION -- WHERE DOES WACC COME FROM? -- WHEN TO USE WACC -- VALUING THE LEVERED BUSINESS ENTERPRISE -- AFTER-TAX WACC -- DEBT CAPACITY AND OPTIMAL CAPITAL STRUCTURE -- COMPUTING WACC FOR A PUBLIC COMPANY -- COMPUTING WACC FOR A NONPUBLIC COMPANY -- SHOULD AN ACTUAL OR A HYPOTHETICAL CAPITAL STRUCTURE BE USED? -- SHOULD A CONSTANT OR VARIABLE CAPITAL STRUCTURE BE USED? -- FIXED BOOK-VALUE LEVERAGE RATIO -- PRE-INTEREST-TAX-SHIELD WACC -- OTHER TAX SHIELDS -- SUMMARY -- ADDITIONAL READING -- TECHNICAL SUPPLEMENT CHAPTERS 5 AND 6 -- Chapter 19: Global Cost of Capital Models -- INTRODUCTION -- RISKS -- COST OF EQUITY CAPITAL MODELS -- EXPANDING MODELS TO INCORPORATE SIZE PREMIUM AND COMPANY-SPECIFIC RISK -- OTHER SOURCES OF GLOBAL COST OF CAPITAL DATA.
SHOULD PROJECTED NET CASH FLOWS AND THE COST OF CAPITAL BE NOMINAL OR REAL? -- CAPITAL STRUCTURE -- SUMMARY -- DATA SOURCES -- ADDITIONAL READING -- Chapter 20: Using Morningstar Cost of Capital Data -- INTRODUCTION -- STOCKS, BONDS, BILLS, AND INFLATION -- IBBOTSON COST OF CAPITAL YEARBOOK -- IBBOTSON BETA BOOK -- COST OF CAPITAL RESOURCES ONLINE -- Part Three: Corporate Finance Officers: Using Cost of Capital Data -- Chapter 21: Capital Budgeting and Feasibility Studies -- INTRODUCTION -- INVEST FOR RETURNS ABOVE COST OF CAPITAL -- DCF IS BEST CORPORATE DECISION MODEL -- FOCUS ON NET CASH FLOW -- CAPITAL CASH FLOW AND ADJUSTED PRESENT VALUE METHODS -- USE TARGET CAPITAL STRUCTURE OVER LIFE OF PROJECT -- SUMMARY -- ADDITIONAL READING -- Chapter 22: Cost of Capital for Divisions and Reporting Units -- INTRODUCTION -- DIVISIONAL COST OF CAPITAL -- REPORTING UNIT COST OF CAPITAL -- GOODWILL IMPAIRMENT-COST OF CAPITAL UNDER IFRS -- SUMMARY -- ADDITIONAL READING -- Chapter 23: Cost of Capital for Fair Value Reporting of Intangible Assets -- INTRODUCTION -- FINANCIAL REPORTING CONTEXT -- FAIR VALUE BALANCE SHEET -- INTANGIBLE ASSET INCOME APPROACH -- DIFFERENTIATING RISKS AMONG ASSETS -- IMPLIED RATE OF RETURN-UNIDENTIFIABLE INTANGIBLE ASSETS -- LIABILITIES -- SUMMARY -- ADDITIONAL READING -- Chapter 24: Cost of Capital in Evaluating Mergers and Acquisitions -- INTRODUCTION -- MIXED RESULTS FROM M&A TRANSACTIONS -- INVEST FOR RETURNS IN EXCESS OF THE COST OF CAPITAL -- DCF IS THE BEST CORPORATE DECISION MODEL -- FOCUS ON CASH FLOWS -- CATEGORIES OF CASH FLOWS -- EST IMATING THE COST OF CAPITAL -- VALUE AND PRICE DIFFER -- IMPACT OF RECENT MARKET CONDITIONS -- COMMON MISTAKES -- NEW RULES FOR ACCOUNTING FOR BUSINESS COMBINATIONS -- SUMMARY -- Chapter 25: Cost of Capital in Transfer Pricing -- INTRODUCTION -- TRANSFER PRICING ANALYSIS.
RELATING VALUATION OF INTANGIBLE ASSETS FOR TRANSFER PRICING TO ASC 805.
Abstract:
Praise for Cost of Capital, Fourth Edition "This book is the most incisive and exhaustive treatment of this critical subject to date."-From the Foreword by Stephen P. Lamb, Esq., Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP, and former vice chancellor, Delaware Court of Chancery "Cost of Capital, Fourth Edition treats both the theory and the practical applications from the view of corporate management and investors. It contains in-depth guidance to assist corporate executives and their staffs in estimating cost of capital like no other book does. This book will serve corporate practitioners as a comprehensive reference book on this challenging topic in these most challenging economic times."-Robert L. Parkinson Jr., Chairman and Chief Executive Office, Baxter International Inc., and former dean, School of Business Administration and Graduate School of Business, Loyola University of Chicago "Shannon Pratt and Roger Grabowski have consolidated information on both the theoretical framework and the practical applications needed by corporate executives and their staffs in estimating cost of capital in these ever-changing economic times. It provides guidance to assist corporate practitioners from the corporate management point of view. For example, the discussions on measuring debt capacity is especially timely in this changing credit market environment. The book serves corporate practitioners as a solid reference."-Franco Baseotto, Executive Vice President, Chief Financial Officer, and Treasurer, Foster Wheeler AG "When computing the cost of capital for a firm, it can be fairly said that for every rule, there are a hundred exceptions. Shannon Pratt and Roger Grabowski should be credited with not only defining the basic rules that govern the computation of the cost of capital, but also a road map to navigate through the hundreds of exceptions.
This belongs in every practitioner's collection of must-have valuation books."-Aswath Damodaran, Professor, Stern School of Business, New York University "Pratt and Grabowski have done it again. Just when you thought they couldn't possibly do a better job, they did. Cost of Capital, Fourth Edition is a terrific resource. It is without a doubt the most comprehensive book on this subject today. What really distinguishes this book from other such texts is the fact that it is easy to read-no small feat given the exhaustive and detailed research and complicated subject matter. This book makes you think hard about all the alternative views out there and helps move the valuation profession forward."-James R. Hitchner, CPA/ABV/CFF, ASA, Managing Director, Financial Valuation Advisors; CEO, Valuation Products and Services; Editor in Chief, Financial Valuation and Litigation Expert; and President, Financial Consulting Group "The Fourth Edition of Cost of Capital continues to be a 'one-stop shop' for background and current thinking on the development and uses of rates of return on capital. While it will have an appeal for a wide variety of constituents, it should serve as required reading and as a reference volume for students of finance and practitioners of business valuation. Readers will continue to find the volume to be a solid foundation for continued debate and research on the topic for many years to come."-Anthony V. Aaron, Americas Leader, Quality and Risk Management, Ernst & Young Transaction Advisory Services.
Local Note:
Electronic reproduction. Ann Arbor, Michigan : ProQuest Ebook Central, 2017. Available via World Wide Web. Access may be limited to ProQuest Ebook Central affiliated libraries.
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