A Review of the Literature on Methods of Computing the Implied Cost of Capital

Posted: 18 Aug 2015 Last revised: 21 Dec 2015

See all articles by Fabian Echterling

Fabian Echterling

Deka Investment GmbH

Brigitte Eierle

University of Bamberg

Simeon Ketterer

University of Bamberg

Date Written: August 11, 2015

Abstract

In this paper we critically review the existing literature on methods of computing the implied cost of capital (ICC). The ICC literature is characterised by a large number of heterogeneous studies reflecting different approaches, models to assess their validity and methods to mitigate potential biases. However, so far there is neither consensus on which ICC approach performs best, how shortcomings can be mitigated effectively, nor how methods can be evaluated adequately. We systematically categorise the various approaches available in the literature, extract assumptions underlying the models, and discuss the empirical results as well as limitations against this background. In doing so, we are able to show what can reasonably be deduced from existing research and what is still unclear, thereby opening up areas for future research.

Keywords: Implied Cost of Capital, Equity Premium, Analysts Forecasts, Business Valuation, Residual Income Valuation, Abnormal Earnings Growth

JEL Classification: G11, G12, G17, G31, M41

Suggested Citation

Echterling, Fabian and Eierle, Brigitte and Ketterer, Simeon, A Review of the Literature on Methods of Computing the Implied Cost of Capital (August 11, 2015). International Review of Financial Analysis, Vol. 42, pp. 235-252, 2015, Available at SSRN: https://ssrn.com/abstract=2642270

Fabian Echterling

Deka Investment GmbH ( email )

Mainzer Landstrasse 16
Frankfurt am Main, 60325
Germany

Brigitte Eierle

University of Bamberg ( email )

Feldkirchenstraße 21
Bamberg, 96052
Germany
00499518632545 (Phone)

HOME PAGE: http://www.uni-bamberg.de/bwl-irwp/home/

Simeon Ketterer (Contact Author)

University of Bamberg ( email )

Feldkirchenstr. 21
Bamberg, 9052
Germany
00499518632407 (Phone)

HOME PAGE: http://www.uni-bamberg.de/bwl-irwp/home/

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