Cost of Capital: Workbook and Technical Supplement PDF
Preview Cost of Capital: Workbook and Technical Supplement
About the pagination of the Bonus Content in this book Due to the unique page numbering scheme of the Bonus Content, the electronic pagination of this section in the eBook does not match the pagination of the printed version. To navigate the Bonus Content, please use the electronic Table of Contents that appears alongside the eBook or the Search function. For citation purposes, use the page numbers that appear in the text. E1FFIRS 09/04/2010 13:42:9 Page2 E1FFIRS 09/04/2010 13:42:9 Page1 Cost of Capital Fourth Edition Workbook and Technical Supplement E1FFIRS 09/04/2010 13:42:9 Page2 E1FFIRS 09/04/2010 13:42:9 Page3 Cost of Capital Fourth Edition Workbook and Technical Supplement SHANNON P. PRATT ROGER J. GRABOWSKI John Wiley & Sons, Inc. E1FFIRS 09/04/2010 13:42:9 Page4 Copyright#2011byJohnWiley&Sons,Inc.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformor byanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptas permittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,withouteithertheprior writtenpermissionofthePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeeto theCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978)750-8400,fax (978)646-8600,orontheWebatwww.copyright.com.RequeststothePublisherforpermissionshould beaddressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ 07030,(201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbesteffortsin preparingthisbook,theymakenorepresentationsorwarrantieswithrespecttotheaccuracyor completenessofthecontentsofthisbookandspecificallydisclaimanyimpliedwarrantiesof merchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedorextendedbysales representativesorwrittensalesmaterials.Theadviceandstrategiescontainedhereinmaynotbesuitable foryoursituation.Youshouldconsultwithaprofessionalwhereappropriate.Neitherthepublishernor authorshallbeliableforanylossofprofitoranyothercommercialdamages,includingbutnotlimitedto special,incidental,consequential,orotherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactour CustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat(317) 572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmay notbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourwebsiteat www.wiley.com. LibraryofCongressCataloging-in-PublicationData: ISBN978-0-470-47606-2;ISBN978-0-470-94492-9(ebk);ISBN978-0-470-94934-4(ebk); ISBN978-0-470-94935-1(ebk) PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 E1FTOC 09/10/2010 16:23:23 Page5 Contents Preface ix AbouttheAuthor xi Acknowledgments xix NotationSystemandAbbreviationsUsinginThisBook xxi PARTONE TechnicalSupplement—SupplementstoChaptersof CostofCapital:ApplicationsandExamples,4thed. CHAPTER1 AlternativeNetCashFlowDefinitions—SupplementtoChapter3 3 Introduction 3 EquityCashFlowMethod 3 InvestedCapitalMethod 4 CapitalCashFlowMethod 5 AdjustedPresentValueMethod 7 ResidualIncomeMethod 8 CHAPTER2 ExamplesofComputingOLSBeta,SumBeta,andFullInformation BetaEstimates—SupplementtoChapter10 10 Introduction 10 ComputingOLSandSumBetaEstimates—AnExample 11 ComputingFull-InformationBetaEstimate—AnExample 15 CHAPTER3 EstimatingBeta:InterpretingRegression Statistics—SupplementtoChapter10 22 Introduction 22 EvaluatingBetaEstimationOutput 25 EvaluatingRegressionOutput 26 v E1FTOC 09/10/2010 16:23:23 Page6 vi CONTENTS CHAPTER4 ExampleofComputingDownsideBetaEstimates—SupplementtoChapter12 31 Introduction 31 ComputingDownsideBetaEstimates 31 CHAPTER5 IterativeProcessUsingCAPMtoCalculatetheCostofEquity ComponentoftheWeightedAverageCostofCapitalWhen CapitalStructureIsConstant—SupplementtoChapter18 34 Introduction 35 CapitalAssetPricingModelandBeta 35 Solution:TheIterativeProcess 36 IterativeProcessUsingaFinancialSpreadsheetModel 39 Summary 48 AdditionalReading 48 CHAPTER6 IterativeProcessUsingCAPMtoCalculatetheCostofEquity ComponentoftheWeightedAverageCostofCapitalWhen CapitalStructureIsChanging—SupplementtoChapter18 49 Introduction 49 AssumptionsInherentinWeightedAverageCostofCapital 50 Solution:IterativeProcesswithChangingCapitalStructure 50 IterativeProcessUsingFinancialSpreadsheetModel 52 EquityValue 60 Summary 62 AdditionalReading 62 CHAPTER7 CostofCapitalandtheValuationofWorthlessStock—Supplement toChapter16 63 Introduction 64 LiquidatingValue 64 PotentialValue 66 Example 67 PossibilityThatValueoftheBusinessEnterpriseExceeds theFaceValueofDebt—PricingEquityasaCallOption 67 PotentialFutureValue:ProbabilityThatBusiness EnterpriseExceedsFaceValueofDebt 73 AdditionalConsiderations 77 Summary 79 E1FTOC 09/10/2010 16:23:23 Page7 Contents vii PARTTWO TechnicalSupplement—SpecificApplicationsofCostofCapital CHAPTER8 CostofCapitalofPrivateInvestmentCompanyInterests 83 Introduction 83 ThePrivateInvestmentCompany 84 RelationshipsbetweenTimetoaLiquidityEventandValue 85 LackofControl 89 LackofMarketabilityorIlliquidity 93 ExampleValuationofPICInterest 99 Summary 105 CHAPTER9 CostofCapitalofRealProperty—IndividualAssets 107 Introduction 107 TypicalStructureofaRealEstateTransaction 108 RealPropertyCompeteswithOtherAssetClasses 109 DirectCapitalizationMethod 111 DiscountedCashFlowMethod 125 EstimatingthePropertyDiscountRate 126 Summary 130 Appendix9A:ValuingRealProperty 131 CHAPTER10 CostofCapitalofRealEstateEntities 139 Introduction 139 DefinitionofaRealEstateEntity 140 MeasuringNetCashFlowforRealEstateEntities 153 ValuationofRealEstateEntities 154 Summary 175 AdditionalReading 176 Appendix10A:ValuingRealEstateEntities 177 PARTTHREE LearningObjectives,Questions,andProblems 185 PARTFOUR AnswersandSolutions 227 Index 247
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