Cost of Capital Estimation: Evaluating Methods and Best Practices

This report examines the estimation of the cost of capital, a critical component in finance and valuation, focusing on the formula (Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity). It analyzes survey responses regarding the use of Discounted Cash Flow (DCF) techniques for evaluating investment opportunities, the determination of target weights, and the application of the Cost of Equity model. The research incorporates historical data to determine beta and risk-free rates, utilizing the Capital Asset Pricing Model (CAPM). The methodology includes an evaluation of the company's beta by incorporating S&P Index and Stock Index data. Survey findings reveal that DCF is a prominent technique for investment evaluation, with the Weighted Average Cost of Capital (WACC) as the appropriate discount rate. The report emphasizes using market values for debt and equity weights to reflect economic reality, summarizing the application of different components of the Cost of Capital method.

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Estimating Cost of Capital
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Estimating the Cost of Capital.........................................................................................................2
Reference.........................................................................................................................................3

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Estimating the Cost of Capital
The research topic considered for the evaluation was the Cost of Capital and the
importance of the same in the application of finance and valuation. The key formula used for
determining the cost of capital is the use of (Weight of Debt*Cost of Debt + Weight of
Equity*Cost of Equity). The survey questions evaluated in the research paper was whether the
DCF techniques were used to evaluate the investment opportunities. The cost of capital used in
the discounting rate and the use and the evaluation of the investment opportunities. The target
weights determination and the use of the same in the application of the Cost of equity model.
However, the beta and risk free rate was determined using the historical data. The estimation of
the cost of equity by the Capital Asset pricing Model and the use and the application of the same.
The research result for the above questions analyzed were in the favor of the research questions
assessed (Li, 2015).
The research methodology used in the evaluation of the beta of the company by
incorporating the data of S&P Index and the Stock Index and the relevant slope i.e.., beta was
determined. The survey methodology was based on the analysis and the survey done on
Corporations, Financial Advisors and the Trade and the Text Books. The key survey findings,
which were evaluated was that the Discounted Cash Flow was the most prominent and used
techniques for evaluation of the Investments. The appropriate discount rate considered for the
Discounted Cash Flow Analysis was the use of the Weighted Average Cost of Capital. The
weights which were applied in the determination of the cost of capital was the use of the market
value rather than the book value of the debt and equity to reflect true and fair economic reality.
The forecasted results was based on the above survey done and the relevant results or the

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application of the different components of the Cost of Capital method was summarized in the
survey section (Baker & Wurgler, 2015).

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Reference
Baker, M., & Wurgler, J. (2015). Do strict capital requirements raise the cost of capital? Bank
regulation, capital structure, and the low-risk anomaly. American Economic Review,
105(5), 315-20.
Li, X. (2015). Accounting conservatism and the cost of capital: An international analysis.
Journal of Business Finance & Accounting, 42(5-6), 555-582.

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