A Firm's Cost of Capital

Posted: 3 Jan 2018

See all articles by Ravi Jagannathan

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

José Liberti

National Bureau of Economic Research (NBER)

Binying Liu

Hong Kong University of Science & Technology (HKUST)

Iwan Meier

HEC Montreal - Department of Finance

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

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

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

José Liberti

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Binying Liu

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Iwan Meier

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7 H2J 2K9
Canada
(514) 340-3198 (Phone)

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