Business Valuation and the Cost of Capital
A common approach to valuing a business is to discount its expected future cash flows at its cost of capital. This note explains how to compute the cost of capital for such an analysis. It consists of three sections: the first is focused on the financial economics of the problem; the second on practical considerations related to calculations; and the third concludes with some cautionary advice.
This document is authorized for use only by Michael Nowiszewski in Investment Banking Fall 2014 taught by Viney Sawhney Harvard University from September 2014 to December 2014.
For the exclusive use of M. Nowiszewski
210-037
Business Valuation and the Cost of Capital
The opportunity cost of funds is comprised of two fundamental parts: time value and a risk premium. Time value represents the return investors earn for being patient, but not taking any risk.
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