"This book is
required reading for anyone involved in the practical issues of cost of capital decisions.
It is written in a way that engages the novice, and yet challenges the professional to
rethink the real issues." Brendan Scholey, Bloomberg.
The cost of capital is the
fundamental financial tool for business decision-making. It drives measures of value
creation and destruction, and forms the basis of financial analysis using cash flow and
other frameworks. This book is here to help the business world to use the cost of capital
for real.
The Real Cost of Capital
describes the key issues in understanding and using the cost of capital today, taking
principles from the world of managerial finance and putting them into the context of major
investment decisions.
Should, for example, a
company use its own cost of capital to appraise new investments and acquisitions? What
cost of capital might a US company use when appraising an investment in, say, the
Philippines? For a typical investment, which type of risk is more important - specific
risk or systematic risk? How should these risks be reflected in, say, a venture capital
situation? Debt is cheaper than equity - so why don't companies raise more debt than
they do? Most practitioners use the weighted average cost of capital ("WACC") in
valuation and appraisal - but when should an alternative approach be used? This book
will help you find the answers.
The Real Cost of Capital
is required reading for anyone involved in the practical issues of cost of capital
decisions. It brings together the latest academic thinking with practical requirements in
a real-life context, and the authors have used their combined experience of advising
governments and international blue-chip companies to bring readers up to date with current
issues.
The Real Cost of Capital
includes chapters on choosing models, calculating the cost of capital using real-life data
sources, and calculating the cost of capital in an international context (a subject not
usually covered in academic texts). It also has chapters and worked examples on the
practical application of the cost of capital in business valuations, high-tech situations
and the wide range of premia and discounts that can be applied to the cost of capital.
The book has an associated
website www.costofcapital.net which contains some current links. The site also
gives access to tax rate information and financial data relevant to using cost of capital
around the world. The objective is to make sure that the corporate planner, student,
adviser or decision maker, when she/he is on the road, can simply open the book or dial in
and take advantage of a wealth of decision-making support, without the pain of extended
academic study.
Table of Contents
Contents
Prologue: The Cost of
Capital World is a Real World
Chapter 1: Risk and Return
Revisited
Chapter 2: CAPM @ Work
Chapter 3: The Great EMRP
Debate
Chapter 4: CAPM is Dead:
Long Live CAPM
Chapter 5: The Cost of Debt
and Optimal Capital Structure
Chapter 6: International
WACC and Country Risk
Chapter 7: Cash Flows, the
Dot.Com Bubble and All That
Chapter 8: Using the Cost of
Capital in Business Valuations
Chapter 9: International
Valuation and Appraisal
Chapter 10: Premia and
Discounts
Epilogue
NB - Examples in The Real
Cost of Capital are drawn from real situations, simplified and disguised as necessary. No
particular theory is espoused or recommended - where theory breaks down and where
textbooks fall short, suggestions are made that meet the test of accepted principles.
About
Authors
The authors work within the
UK Valuation and Strategy practice at PricewaterhouseCoopers. They advise top private and
public sector clients on cost of capital issues in the context of mergers and
acquisitions, investment appraisal, shareholder value analysis, business strategy, price
setting, and regulatory and anti-trust inquiries.
Tim Ogier is a Partner and
leads the UK Economic Advisory Services team. He holds undergraduate and masters degrees
in economics from the London School of Economics. Formerly Chief Economic Adviser at
British Rail and author of the Economist Intelligence Unit's UK country reports, Tim is
married and lives in London.
John Rugman is the Director
who leads the PwC Financial Economics team. He has a background working in the City of
London in investment management and equity research, and holds an undergraduate degree in
economics and a masters degree in economics and finance. He is married with two children
and lives in Oxfordshire.
Lucinda Spicer is a Partner
and the former head of the UK Valuation and Strategy practice at PricewaterhouseCoopers.
She is a Council member of the Society of Share and Business Valuers, holds an MA degree
from the University of Cambridge and is a member of the Institute of Chartered Accountants
in England and Wales. She has a background in business valuation, venture capital and tax
mergers and acquisitions restructuring, and is married with children and lives in
Scotland.
Reviews
"This book is required
reading for anyone involved in the practical issues of cost of capital decisions. It is
written in a way that engages the novice, and yet challenges the professional to rethink
the real issues."Brendan Scholey, Bloomberg.
"Capital is the
lifeblood of any business and taking into account its cost is critical for sound
decision-taking. This book provides a very accessible and comprehensive guide to the topic
and should be of great value to all those involved in strategic and financial issues
within business."Dr Andrew Sentance, Chief Economist, British Airways.
"The authors have
succeeded in translating the technical jargon often surrounding cost of capital, creating
a highly useful guide for corporate executives."Roger J. Grabowski, Managing
Director, Standard & Poor's Corporate Value Consulting.
"An excellent book that
achieves the right balance between theory and practice, and provides comprehensive and
practical guidance regarding the main problems faced by valuation practitioners attempting
to use discounted cash flow techniques." Peter Elwin, Head of Accounting and
Valuation Research, Cazenove.
"International
valuation has always been confusing. There are many approaches and few guides. Ogier,
Rugman and Spicer fill an important void. This book will be required reading for those
doing international deals." Professor Campbell R. Harvey, J. Paul Sticht Professor of
International Business, Duke University.
"Ogier, Rugman and
Spicer have given us a clear and practical guide to this important and complex subject,
which can be so difficult to apply in the real world."Penny Adomakoh, Technical
Director, Rothschild
"It has been eight
years since my MBA and five years since my CFA. This book provided me with advanced
up-to-date discussion of all the latest arguments and controversies surrounding the cost
of capital. The authors have set out a no nonsense, no jargon approach and the book is a
must read for business professionals, investment advisers and students." Paul
Ginocchio, Media equity analyst, Deutsche Bank North America.
290 pages