Corporate Finance
Estimating the Cost of Capital
Estimating the cost of capital requires a coherent set of assumptions about currency, business risk, marginal debt and target capital structure rather than the observation of a single rate.
Course purpose
The decision examined
For an illiquid or unlisted company, business risk is often reconstructed from comparables. Their leverage must be removed before the target company's financing structure is applied.
Objectives
Learning outcomes
- Select a currency-consistent reference rate.
- Build a business-risk peer group.
- Unlever and relever beta.
- Document a defensible WACC range.
Concepts
Key concepts
- Reference rate
- Equity risk premium
- Asset beta
- Credit spread
- Target leverage
- Country risk
Syllabus
Course structure
- Estimation architecture
- Currency
- Risk premium
- Comparables
- Marginal debt
- Sensitivity
Extract
Analytical framework
Isolate business risk
Under a simplified convention in which debt risk is limited, observed equity beta may be unlevered as follows:
Unlevered beta
The resulting asset betas are comparable only when the underlying activities, cyclicality and operating models are sufficiently similar.
Full course
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