Best Practice Wacc

BROTHERSON ET AL. – “BEST PRACTICES” IN ESTIMATING THE COST OF CAPITAL: AN UPDATE

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“Best Practices” in Estimating the Cost of Capital: An Update

W. Todd Brotherson, Kenneth M. Eades, Robert S. Harris, and Robert C. Higgins

Theories on cost of capital have been around for decades. Unfortunately for practice, the academic discussions typically stop at a high level of generality, leaving important questions

“Cost of capital is so critical to things we do, and CAPM has so many holes in it—and the books don’t tell you which numbers to use… so at the end of the day, you wonder a bit if you’ve got a solid number. Am I fooling myself with this - A corporate survey participant converged into compelling recommendations about the cost of capital to a corporation. By the early 1990s, a consensus had emerged prompting descriptions such as “traditional... textbook...appropriate,” “theoretically correct,” “a useful rule of thumb” and a “good vehicle.” In prior work with

This paper updates our earlier work on the state of the art in cost of capital estimation to identify current best practices that emerge. Unlike many broadly distributed multiple on conversations with practitioners at highly regarded on advice from best-selling textbooks and trade books. common theoretical frameworks to estimate the cost of variation, however, for the joint choices of the risk-free rate of return, beta and the equity market risk premium, as well

practice has changed some since the late 1990s but there is still no consensus on important practical issues. The paper ends with a synthesis of messages from best practice

of implementation.1 study. We revisit the issues and see what now constitutes best practice and what has changed in both academic recommendations and in practice.

capital costs. This evidence is valuable in several respects.

The authors thank Bob Bruner for collaboration on prior research. His duties as a dean, however, prevent his joining this effort. We...