Is the organization really making an actual profit? Enough profit to compensate the owners for the risks they are taking? Does management know how to estimate the cost of capital ('COC')? Determining the COC for a privately held business is complex and nuanced. We will address these issues, the latest academic research, and provide a practical method of gaining a reasonable estimate of the true cost of capital for a closely held company. Armed with this information, you will be able to make better business decisions that take into account the true cost of making new investments and assess the true economic operating performance of the firm. The COC is used every day by the best leaders, and we can do a better job of developing the COC.
Learning Objectives
After attending this presentation, you will be able to...
- Recognize the significance of understanding the cost of capital and why it is critical
- Calculate the cost of capital for a publicly traded company
- Analyze how leverage affect the cost of equity
- Calculate the cost of capital for a closely held company
- Use this key metric properly
Major Topics
The major topics that will be covered in this course include:
- Why is it important to know the cost of capital?
- Traditional ways to measure cost of capital for publicly traded companies
- Modigliani and Miller and the irrelevance of capital structure
- The impact of leverage on Beta and the cost of equity
- Finding surrogate companies to benchmark to
- Adjusting surrogates, leverage, de-leveraging and re-leveraging
- Adjusting the modified surrogate Beta from public to private
- Common pitfalls explained
- It’s an art, not a science
- Why your estimate will be wrong, but it's OK.
- Why is it better to be approximately right than precisely wrong by ignoring COC
