The Cost of Capital: Intermediate Theory
This book provides an answer to the question, 'What does the finance and economics literature say about the determination and estimation of a project's cost of capital?'. Uniquely, it reviews both the theory of asset pricing in discrete time and a range of more applied topics which relate to project valuation, including the effects of corporate and personal taxes, the international dimension, estimation of the cost of equity in practice, and the cost of capital for regulated utilities. It seeks to explain models and arguments in a way which does justice to the reasoning, whilst minimising the prior knowledge of finance and maths expected of the reader. It acts as a bridge between a general undergraduate or MBA text in finance, accounting or economics, and the modern theoretical literature on the cost of capital.
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The cost of capital under certainty
The capital asset pricing model and multifactor models
The consumptionbased model
The equity risk premium
Corporation tax leverage and the weighted average cost of capital
the old and the new views
Personal tax leverage and multiple tax rates
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abnormal earnings adjustment advantage to debt arbitrage arithmetic mean asset pricing assumed assumption beta book value cent p.a. chapter company's constant corporation tax cost of capital cost of debt cost of equity covariance discount rate dividend discount model dividend yield effect efficient portfolio elementary claims equation equilibrium equity and debt equity premium example excess return expected cash flows expected premium expected rate expected return expected utility expected value financial assets firm forecast given growth rate implies income increase individual interest rate investment investors leverage marginal utility market portfolio market value maximise measured method multifactor models negative nominal one-period pay-off period predicted present value project's cost rate of return real rate real return return on equity risk aversion risk premium risk-free rate risky assets shareholders standard CAPM tax advantage tax savings tax-adjusted WACC trading uncertainty United unlevered utility function valuation variables variance WACC zero