Assessing the Cost of Capital
Financial Times Executive Briefings

By John Pointon
Financial Times / Pearson Education
July 2002
ISBN: 0-273-65478-0
142 Pages, Illustrated, 8 ¼" x 11 ¾"
$225.00 paper original


The cost of capital is essential to all business problems that are concerned with future outcomes. Yet estimating it is a difficult task. The cost of capital lies at the heart of corporate finance, where the individual costs of the firm’s sources of finance are evaluated. To be able to assess the cost of capital is vital to your company’s strategic plan. This briefing provides you with the means to do so.

It begins by addressing the implementation of a responsible debt policy framework then evaluates the cost of debt, taking into account tax planning issues at national and international levels. The briefing goes on to consider six approaches to assessing the cost of equity and finally deals with policies and implementation strategies, providing you with a practical framework for managing the cost of capital in your company.

Chapter 1. Assessing Earnings Price-earnings ratio - the starting point Normalising the cost of equity for competitive markets Supernormal cost of equity Encapsulating the effects of competitive advantage
Chapter 2. Dividend Approaches and the Returns Index Utilising dividend yields Regularising dividend growth Projecting growth splits Employing a returns index - dividend and capital gains yield
Chapter 3. Capital Asset Pricing Perspectives on the risk premium Explaining the beta risk factor Pricing capital assets for the diversified investor International dimensions
Chapter 4. Multi-factors and Industry Bench-marking Introducing the firm size factor Economic values- the ‘q’ effect Industry bench-marking
Chapter 5. Assessing the Cost of Debt Nominal and market values Deriving the cost of debt Introducing tax effects Chapter 6. Gearing and the Overall Cost of Capital A simple weighted average Gearing and the financial premium approach De-gearing betas
Chapter 7. Alternative Approaches to Project Appraisal Using the weighted average cost of capital using the equity flow method
Chapter 8. Managing the Cost of Debt Interest cover Interest rates Currency risk Asset backing Tax planning Chapter 9. Overview Assessing the equity cost of capital Reviewing the overall cost of capital References Appendix 1

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