An Introduction to the Cost of Capital

27 Pages Posted: 22 Mar 2010 Last revised: 12 Dec 2015

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Joseph Tham

Educational Independent Consultant

Multiple version iconThere are 2 versions of this paper

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

Velez-Pareja, Ignacio and Tham, Joseph, An Introduction to the Cost of Capital (March 14, 2010). Available at SSRN: https://ssrn.com/abstract=1570718 or http://dx.doi.org/10.2139/ssrn.1570718

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

Joseph Tham

Educational Independent Consultant ( email )

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