January 2018 Data Update 6: A Cost of Capital Primer
aswathdamodaran.substack.com
I have long described the cost of capital as the Swiss Army Knife of finance, since it shows up in so many places in finance, albeit in different forms. In corporate finance, it is not only the cost of raising funding for a business but also the hurdle rate to use in capital budgeting and an optimizing tool for capital structure and dividend policy. In valuation, it is the discount rate that we use to value a business and the only mechanism for incorporating the risk of a business into its value. Along the way, it picks up a variety of other names that are used to describe it (with my least favorite one being the WACC acronym) and gets confused or used interchangeably with the cost of equity. In short, it is not surprising that there seems to be little consensus on how to estimate the cost of capital for a business.
January 2018 Data Update 6: A Cost of Capital Primer
January 2018 Data Update 6: A Cost of Capital…
January 2018 Data Update 6: A Cost of Capital Primer
I have long described the cost of capital as the Swiss Army Knife of finance, since it shows up in so many places in finance, albeit in different forms. In corporate finance, it is not only the cost of raising funding for a business but also the hurdle rate to use in capital budgeting and an optimizing tool for capital structure and dividend policy. In valuation, it is the discount rate that we use to value a business and the only mechanism for incorporating the risk of a business into its value. Along the way, it picks up a variety of other names that are used to describe it (with my least favorite one being the WACC acronym) and gets confused or used interchangeably with the cost of equity. In short, it is not surprising that there seems to be little consensus on how to estimate the cost of capital for a business.