Cost of Capital Workbook and Technical Supplement

by Pratt, Shannon P.; Grabowski, Roger J.

• ISBN13: 9780470476062
• ISBN10: 0470476060
• Edition: 4th
• Format: Paperback
• Copyright: 2010-11-09
• Publisher: Wiley

Summary

In this long-awaited Third Edition of Cost of Capital: Applications and Examples, renowned valuation experts and authors Shannon Pratt and Roger Grabowski address the most controversial issues and problems in estimating the cost of capital. This authoritative book makes a timely and significant contribution to the business valuation body of knowledge and is an essential part of the expert's library.

Author Biography

Shannon P. Pratt, CFA, ARM, ABAR, FASA, MCBA, CMAA, referred to as the father of business valuations, is the author of several bestselling Wiley business valuation books and a sought-after speaker at business valuation industry conferences. He is the managing owner of Shannon Pratt Valuations Portland, Oregon, and has served as supervisory analyst for over 3,000 business valuation engagements in forty years and as an expert witness in numerous state and federal courts on contested business valuations. Roger J. Grabowski is managing director of Duff Phelps LLC. Roger has testified in court as an expert witness on the value of closely held businesses and business interests, matters of solvency, valuation, and amortization of intangible assets, and other valuation issues. He testified in the Northern Trust case, the first U.S. Tax Court decision that adopted the discounted cash flow method to value the stock of a closely held business with the discount rate based on the capital asset pricing model. Grabowski authors the annual Duff Phelps Risk Premium Report.

Table of Contents

Preface	p. ix
About the Author	p. xi
Acknowledgments	p. xix
Notation System and Abbreviations Using in This Book	p. xxi
Technical Supplement-Supplements to Chapters of Cost of Capital: Applications and Examples, 4th ed.
Alternative Net Cash Flow Definitions-Supplement to Chapter 3	p. 3
Introduction	p. 3
Equity Cash Flow Method	p. 3
Invested Capital Method	p. 4
Capital Cash Flow Method	p. 5
Adjusted Present Value Method	p. 7
Residual Income Method	p. 8
Examples of Computing OLS Beta, Sum Beta, and Full Information Beta Estimates-Supplement to Chapter 10	p. 10
Introduction	p. 10
Computing OLS and Sum Beta Estimates-An Example	p. 11
Computing Full-Information Beta Estimate-An Example	p. 15
Estimating Beta: Interpreting Regression Statistics-Supplement to Chapter 10	p. 22
Introduction	p. 22
Evaluating Beta Estimation Output	p. 25
Evaluating Regression Output	p. 26
Example of Computing Downside Beta Estimates-Supplement to Chapter 12	p. 31
Introduction	p. 31
Computing Downside Beta Estimates	p. 31
Interative Process Using CAPM to Calculate the Cost of Equity Component of the Weighted Average Cost of Capital When Capital Structure Is Constant-Supplement to Chapter 18	p. 34
Introduction	p. 35
Capital Asset Pricing Model and Beta	p. 35
Solution: The Iterative Process	p. 36
Iterative Process Using a Financial Spreadsheet Model	p. 39
Summary	p. 48
Additional Reading	p. 48
Iterative Process Using CAPM to Calculate the Cost of Equity Component of the Weighted Average Cost of Capital When Capital Structure is Changing-Supplement to Chapter 18	p. 49
Introduction	p. 49
Assumptions Inherent in Weighted Average Cost of Capital	p. 50
Solution: Iterative Process with Changing Capital Structure	p. 50
Iterative Process Using Financial Spreadsheet Model	p. 52
Equity Value	p. 60
Summary	p. 62
Additional Reading	p. 62
Cost of Capital and the Valuation of Worthless Stock-Supplement to Chapter 16	p. 63
Introduction	p. 64
Liquidating Value	p. 64
Potential Value	p. 66
Example	p. 67
Possibility That Value of the Business Enterprise Exceeds the Face Value of Debt-Pricing Equity as a Call Option	p. 67
Potential Future Value: Probability That Business Enterprise Exceeds Face Value of Debt	p. 73
Additional Considerations	p. 77
Summary	p. 79
Technical Supplement-Specific Applications of Cost of Capital
Cost of Capital of Private Investment Company Interests	p. 83
Introduction	p. 83
The Private Investment Company	p. 84
Relationships between Time to a Liquidity Event and Value	p. 85
Lack of Control	p. 89
Lack of Marketability or Illiquidity	p. 93
Example Valuation of PIC Interest	p. 99
Summary	p. 105
Cost of Capital of Real Property-Individual Assets	p. 107
Introduction	p. 107
Typical Structure of a Real Estate Transaction	p. 108
Real Property Competes with Other Asset Classes	p. 109
Direct Capitalization Method	p. 111
Discounted Cash Flow Method	p. 125
Estimating the Property Discount Rate	p. 126
Summary	p. 130
Valuing Real Property	p. 131
Cost of Capital of Real Estate Entities	p. 139
Introduction	p. 139
Definition of a Real Estate Entity	p. 140
Measuring Net Cash Flow for Real Estate Entities	p. 153
Valuation of Real Estate Entities	p. 154
Summary	p. 175
Additional Reading	p. 176
Valuing Real Estate Entities	p. 177
Learning Objectives, Questions, and Problems	p. 185
Answers and Solutions	p. 227
Index	p. 247
Table of Contents provided by Ingram. All Rights Reserved.