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The Cost of Capital

The cost of capital is a central input into discounted cash flow valuation and is a key part of both corporate financial practice and valuation. In the eight sessions, listed below, I lay out my thoughts on what the cost of captial is supposed to measure, estimation questions and matters of practice. I have also attached links to my papers and blog posts on each topic.

Session 1: Setting the Table

Webcast Papers/Research
Webcast(s)

Setting the table (Webcast, Slides to accompany webcast)

Session 2: The Risk free Rate

Webcast Papers/Research
Webcast(s)

The Risk free rate (Webcast, Slides to accompany webcast)

Papers
  1. Into the Abyss: What if nothing is riskfree?
  2. What is the risk free rate?
Datasets
  1. US Treasury bond & bill rates: 1928-Current
  2. Sovereign CDS Spreads
  3. Default Spreads by Sovereign Rating class
Spreadsheets  
Blog posts
  1. What is the risk free rate? (September 2008)
  2. Low risk free rates (February 2009)
  3. Thoughts on the riskfree rate (February 2010)
  4. A Sovereign Rating Downgrade for the US? (August 2011)
  5. Risk free rates and Value (September 2011)
Readings and other links
  1. Getting to a world without risk free
  2. Sovereign Bonds: Reassessing the Risk free rate

Session 3: The Price of Equity Risk - Equity Risk Premiums I

Webcast Papers/Research
Webcast(s)

Equity Risk Premiums I (Webcast, Slides to accompany webcast)

Papers
  1. Equity Risk Premiums: Measures, Estimation and Implications - The 2011 Edition
Datasets
  1. Historical Risk Premium for US
  2. Equity Risk Premiums for other countries
Spreadsheets  
Blog posts
  1. Equity Risk Premiums: The 2011 Edition (February 2011)
  2. Equity Risk Premiums and the Fear of Catastrophe (March 2010)
  3. Equity Risk Premiums: The 2012 Edition (March 2012)
  4. Country Risk Premiums
Readings and other links
  1. Classic Rule of Risk Premium under attack (WSJ)
  2. Greenspan on the Risk Premium
  3. Estimating Risk Premiums
  4. Those were the days... An argument for lower risk premiums
  5. Historical Risk Premiums: A reexamination
  6. Country bond default spreads over time

Session 4: The Price of Equity Risk - Equity Risk Premiums II

Webcast Papers/Research
Webcast(s)

Equity Risk Premium II (Webcast, Slides to accompany webcast)

Papers
  1. A New Risky World Order: Unstable Risk Premiums
Datasets
  1. Implied Premium for United States: 1960- Current
Spreadsheets
  1. Implied equity risk premium estimator
Blog posts
  1. The Equity Risk Premium: Key number for stocks (September 2008)
  2. Reversals in Risk Premia (January 2010)
  3. Momentum versus Contrarian: Two Reads of ERP (August 2011)
Readings and other links
  1. The Implied Equity Risk Premium: An Evaluation of Empirical Methods
  2. The Equity Premium Puzzle (Wikipedia)
  3. Market Risk Premium used in 56 Countries

Session 5: Measuring Asset Risk - The Diversified Marginal Investor

Webcast Papers/Research
Webcast(s)

Risk to a diversified investor (Webcast, Slides to accompany webcast)

Papers
  1. Estimating Risk Parameters
Datasets
  1. Betas by sector
    - United States
    - Emerging Markets
    - Europe
    - Japan
    - Global
  2. Risk Measures by Markct Cap
Spreadsheets
  1. Beta Regression (Run your own regression)
  2. Regression (Analyze regression output)
  3. Levered Beta estimator
Blog posts
  1. The problem with regression betas (February 2009)
  2. Can betas be negative? (February 2009)
  3. What betas can and cannot do....(February 2009)
  4. Alternatives to Regression betas (February 2009)
  5. Fama French and the Proxy Wars (February 2009)
  6. Alternatives to CAPM (Six Part Series) in April 2011
Readings and other links
  1. Estimating Risk Parameters
  2. A contrary view on betas

Session 6: Measuring Asset Risk in the absence of diversification

Webcast Papers/Research
Webcast(s)

Risk to a undiversified investor (Webcast, Slides to accompany webcast)

Papers
  1. Into the Abyss: What if nothing is riskfree?
  2. Estimating Risk free rates
Datasets
  1. Total Betas by sector
    - United States
    - Emerging Markets
    - Europe
    - Japan
    - Global
Spreadsheets  
Blog posts
  1. How much diversification is too much? (November 2011)
  2. Staying private versus Going Public (July 2011)
Readings and other links
  1. Equity Portfolio Diversification (Goetzmann & Kumar)
  2. Portfolio Concentration & Performance of individual investors
  3. Using the Private Cost of Capital Model

Session 7: The borrowing option - Defining and Costing Debt

Webcast Papers/Research
Webcast(s)

The Cost of Debt (Webcast, Slides to accompany webcast)

Papers
  1. Debt and Leases
Datasets
  1. Default Spreads by Ratings Class
  2. Debt Ratios by sector - US and Global
Spreadsheets
  1. Synthetic Ratings Estimator
Blog posts  
Readings and other links
  1. S&P on the Ratings Process (Check under Ratings & Criteria)
  2. Off Balance Sheet Items

Session 8: The Cost of Capital: Weighting and Summing up

Webcast Papers/Research
Webcast(s)

Cost of Capital (Webcast, Slides to accompany webcast)

Papers  
Datasets
  1. Cost of Capital by Sector
Spreadsheets
  1. Cost of Capital Estimator
  2. Operating lease converter
  3. Optimal Capital Structure asssessor
Blog posts  
Readings and other links
  1. Why has the crisis not shaken the cost of capital?