Estimating the Cost of Capital

The cost of capital is the expression used in finance for the cost of a company’s funds (primarily debt and equity) or, from an investor’s point of view, the required rate of return on a company’s securities. It is the fundamental discount rate used in a discounted cash flow analysis to evaluate investment projects of a company since it is the minimum return that investors expect for providing capital to a company, thus setting a return benchmark that a project should meet. 

This course:

• Reviews alternative approaches to estimating the cost of capital, focusing on the Capital Asset Pricing Model (CAPM) and weighted average cost of capital (WACC) calculation.
• Describes common proxies for the risk-free rate and market return.
• Discusses alternative ways to estimate a project’s beta and how to adjust for the amount of leverage used.
• Details how to estimate the cost of debt.
• Introduces advanced multi-factor versions of the CAPM.