Estimating Cost of Capital Using Bottom-up Betas
- Topics:
- Analysis
- Tags:
- Certified Public Accountant,
- Economic Value Added,
- Economic Value-Added Analysis,
- Finance,
- Financial Accounting,
- Financing,
- Investment,
- Investment Theory,
- Managerial Accounting
- Source:
- The CPA Journal
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Overview: "Every business must assess where to invest its funds and regularly reevaluate the quality and risk of its existing investments. Investment theory specifies that firms should invest in assets only if they expect them to earn more than their risk-adjusted hurdle rates. Knowing a business cost of capital allows a comparison of different ways of financing its operations. Knowing the cost of capital also permits a company to determine its value of operations and evaluate the effects of alternative strategies. In value-based management, a business current value of operations is calculated as the present value of the expected future free cash flows discounted at the cost of capital. This paper is useful as a guide in decision making as well as for projecting future financing needs.The cost of capital is also used in the computation of economic value added (EVA). EVA is useful to the managers of the company as well as to external financial analysts. It is a measure of the economic value created by a company in a single year. "
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Format: HTML | Date: May 2003 | Pages: 1
