A Firm's Cost of Capital
Posted: 3 Jan 2018
Date Written: November 2017
Abstract
To create value, a firm must invest in projects that provide a return greater than the cost of capital. The cost of capital is not observed and its estimation requires assumptions on investors’ consumption, savings, and portfolio decisions. We review the academic literature on firms’ cost of financial capital and the estimation of the different components: cost of equity, cost of debt, and their relative weights. We also review various approaches to estimating the cost of capital and the assumptions justifying these approaches.
Suggested Citation: Suggested Citation
Jagannathan, Ravi and Liberti, José and Liu, Binying and Meier, Iwan, A Firm's Cost of Capital (November 2017). Annual Review of Financial Economics, Vol. 9, pp. 259-282, 2017, Available at SSRN: https://ssrn.com/abstract=3095981 or http://dx.doi.org/10.1146/annurev-financial-110716-032429
Feedback
Feedback to SSRN
If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday.