Talk:Cost of capital

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==history== Mohit I don't know if it's bad english or a bunch of baloney, look at the history of this page, the meaning of the article is unrecognizable at times.--Jerryseinfeld 03:58, 9 Jan 2005 (UTC)

Contents

[edit] Retained earnings

Note that retained earnings is also charged at the cost of equity, since if the money is not reinvested it will normally be returned to shareholders. Investors expect retained earnings to earn the same return as money initially invested.

Can someone explain this? It's "charged" at the cost of equity? Does it mean that the cost of retained earnings is the same as the cost of equity?--Jerryseinfeld 04:17, 9 Jan 2005 (UTC)

I rewrote it like this:--Jerryseinfeld 04:57, 9 Jan 2005 (UTC)

"Note that the cost of retained earnings is also estimated like this, since investors expect retained earnings to earn the same return as dividends reinvested in the firm."
Wouldn't it be easier to drop this? It is, in fact, a truism: retained earnings are part of equity, so by definition the statement is true.--Gregalton 22:07, 19 November 2006 (UTC)

[edit] Risk premium

This value of the risk premium parameter varies over time and place, but over many countries during the twentieth century it has averaged around 8%

This is absolutely wrong. The annual return of the 30 Dow Industrials including dividends have been 7% 1905-2005. While the return on bonds with similar duration, say one year treasury bonds, have been, what? 3%? So the risk premium is not a penny more than 3-4%.--Jerryseinfeld 04:15, 9 Jan 2005 (UTC)

[edit] Ex ante

This is so incredibly stupid:

"the value cannot be known "ex ante" (beforehand), but can be estimated from "ex post" (past) returns and past experience with similar firms."

Oh, really? I thought you COULD know the future with certainty.--Jerryseinfeld 04:53, 9 Jan 2005 (UTC)

[edit] Diversified

"The computation of the cost of equity for a public company is computed assuming that equity investors are diversified"

Do you understand what you're saying? Of course it's about a diversifed portfolio, it's about AVERAGES, AVERAGE risk and AVERAGE return, do you understand?--Jerryseinfeld 05:06, 9 Jan 2005 (UTC)

[edit] Merging with Expected Rate of Return

I don't think that it's appropriate to merge this article with the "expected rate of return" article. The one, rate of return, is related to investment/asset pricing theory and the other, cost of capital, is related to capital structure and financing. They're separate tools used for separate purposes. In fact, capital structure is a tool used internally by the corporation's management while asset pricing models are used by external investors and analysts. Ultimately, the capital structure does have an impact upon the price of the firm's stock in the marketplace but that's only a part of the application of expected rate of return. Vraguso 17:07, 19 February 2007 (UTC)

[edit] Significant edit in march 2007

Moved to bottom of page as is traditional.--Gregalton 13:56, 1 April 2007 (UTC)

I guess the entire article needs a revision. It mixes several topics alltogether: how cost of capital is defined, how it is evaluated and empirically estimated, what the relation is between different forms of cost of capital (in particular: cost of equity, cost of debt) and what role taxes play. This should be done with care and not by throwing examples, numbers and formulas to the reader. Furthermore, you need to cite some literature that is newer than MoMi. .. User:Al64 1 Apr 2007.

[edit] Is debt really cheaper than equity

Merton Miller didn't think so when he wrote "Debt & Taxes". And the page's current contention that only profitable firms benefit from the tax shield ignores NOL carryforwards. In all, it's a pretty poorly-written article.