CHAPTER 45
Advice on Dealing with Cost of Capital Issues
Reporting Unit Cost of Equity Capital
Weighted Average Cost of Capital
Cost of Capital of Proposed Acquisition
Discounts for Lack of Control and Lack of Marketability
INTRODUCTION
The authors get asked many questions about cost of capital issues. We thought we would share our experiences and views with the users of this book. While many sources deal theoretically with cost of capital issues, there is not as much information available for resolving related issues on client engagements. Following are some examples of how we handle challenging questions.
PRACTICAL ISSUES AND ADVICE
We present a series of questions and our replies in the following pages.
Equity Risk Premium
Question: It has been my practice to use the realized risk premium data from the back page of the SBBI Valuation Yearbook in developing the cost of equity capital. After reading the summary of the research presented in Chapter 8, I have come to the conclusion that I must consider an alternative approach to estimating an equity risk premium (ERP). How do I reconcile my conclusion this year with my past practices?
Advice: The guiding principle in conducting valuations ...
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