Transcription of Aswath Damodaran April 2016 Abstract - New York University
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Aswath Damodaran April 2016 Abstract - New York University
The cost of capital : The Swiss Army Knife of Finance Aswath Damodaran April 2016 Abstract There is no number in finance that is used in more places or in more contexts than the cost of capital . In corporate finance, it is the hurdle rate on investments, an optimizing tool for capital structure and a divining rod for dividends. In valuation, it plays the role of discount rate in discounted cash flow valuation and as a control variable, when pricing assets. Notwithstanding its wide use, or perhaps because of it, the cost of capital is also widely misunderstood, misestimated and misused. In this paper, I look at what the cost of capital is trying to measure and how best to avoid the pitfalls that I see in practice.
The cost of capital, in its most basic form, is a weighted average of the costs of raising funding for an investment or a business, with that funding taking the form of either debt or equity.
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