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In this long-awaited Third Edition of Cost of Capital: Applications and Examples, renowned valuation experts and authors Shannon Pratt and Roger Grabowski address the most controversial issues and problems in estimating the cost of capital. This authoritative book makes a timely and significant contribution to the business valuation body of knowledge and is an essential part of the expert's library.
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Cost of Capital
Applications and Examples
Cost of capital estimation has long been recognized as one of the most critical elements in business valuation, capital budgeting, feasibility studies, and corporate finance decisions. It is also the most difficult procedure to perform and assess. In this long-awaited Third Edition of Cost of Capital: Applications and Examples, renowned valuation experts and authors Shannon Pratt and Roger Grabowski address the most controversial issues and problems in estimating the cost of capital.
Presenting both the theoretical development of cost of capital estimation and its practical application to valuation, capital budgeting, forecasting of expected investment returns, and rate-setting problems encountered in current practice, Cost of Capital is both a learning text and a handy reference for both the practitioner and the reviewer. Pratt and Grabowski deftly review and explore the theory of whatdrivesthe cost of capital, the models currently in use to estimate cost of capital, and the data available as inputs to the models to estimate cost of capital.
Now in a thoroughly updated and comprehensive Third Edition, Cost of Capital summarizes the results and practical implications of the latest research—much of which is gleaned from never-before-published academic working papers—and includes scores of formulas and elucidating examples throughout to enhance readers' insights. Pratt and Grabowski have updated their text to include a host of new material, including:
A new chapter covering cost of capital for financial reporting under SFAS 141, 142 and 144
A new chapter on risk measures and their relationship to cost of capital
Extensive examples illustrating development of cost of equity by the build-up method and the capital asset pricing model using size premiums from Morningstar andtheauthoritativeDuff & Phelps's Risk Premium Report data; development of company-specific risk premiums using Duff & Phelps's Risk Premium Report risk/return data; and development of capital structure at market value and weighted average cost of capital with constant and varying capital structures
A new chapter covering cost of capital for companies in developing economies
A new chapter covering cost of capital for transfer pricing
An update of "Cost of Capital in the Courts"
"Handling the Discount for Marketability" chapter is now expanded to include sources of data on minority interest transactions and control transactions
Specialized chapters by leading experts in real estate, property tax, and family limited partnership valuations
In addition to detailed exposition of the build-up and capital asset pricing models for estimating the cost of capital, Pratt and Grabowski present in-depth analysis of the components, including the equity risk premium, beta and the size effect. The dynamic author team also analyzes criticism of major models for developing estimates of the cost of capital in use today and also present procedures for a number of alternative models. This definitivetext is an indispensable reference tool for professional valuation practitioners as well as attorneys and judges, investment bankers, CFOs, academicians and students, and CPAs.From the Back Cover:
Praise for the Third Edition of Cost of Capital
"Shannon Pratt and Roger Grabowski have not only brought together all of the issues in the cost of capital computation but have done so in a way that melds timely advice for practitioners with serious debate about the best practices in the area; it belongs on the bookshelves of serious valuation practitioners."
—Aswath Damodaran, Professor, New York University, Stern School of Business
"One of the four traits of great executives is their understanding of the fundamental reality of wealth creation—successful organizations invest to earn a rate of return in excess of their cost of capital. Organizations need assistance in better understanding and estimating the cost of capital and in communicating their results. This book can be a valuable tool for executives and their organizations."
—Geoffrey Colvin, Editor at Large, Fortune
"Cost of Capital, authored by two of the leading valuation experts in North America, is a comprehensive resource for financial professionals engaged in business appraisal, fair value measurement for financial reporting, corporate finance, damage quantification, and transfer pricing. This authoritative book makes a timely and significant contribution to the business valuation body of knowledge and is clearly an essential part of the expert's library."
—Richard M. Wise, FASA, MCBA, CVA, FCBV, FCA, Managing Partner, Wise, Blackman LLP
"I do not think you will find, anywhere, as comprehensive a book on cost of capital as this impressive Third Edition. Pratt and Grabowski have presented a great deal of valuable research in a very understandable manner. They also provide information and opinions that challenge some generally accepted data sources and applications, particularly, as it pertains to equity risk premiums. This book is a must-read."
—James R. Hitchner, CPA/ABV, ASA, Managing Director, The Financial Valuation Group, Editor in Chief, Financial Valuation and Litigation Expert journal
"Shannon Pratt and Roger Grabowski have combined painstaking research and writings from other contributors, with thoughtful commentary, views and advice surrounding the topic of the cost of capital, into a single volume. It is written in a style that should appeal to a wide variety of constituents. It advances the state of reference material on this topic for valuation practitioners and will also provide 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
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