A Firm's Cost of Capital

Ravi Jagannathan, José Liberti, Binying Liu, Iwan Meier

Research output: Contribution to journalReview articlepeer-review

Abstract

To create value, a firm must invest in projects that provide a return greater than the cost of capital. The cost of capital is not observed and its estimation requires assumptions on investors' consumption, savings, and portfolio decisions. We review the academic literature on firms' cost of financial capital and the estimation of the different components: cost of equity, cost of debt, and their relative weights. We also review various approaches to estimating the cost of capital and the assumptions justifying these approaches.

Original languageEnglish (US)
Pages (from-to)259-282
Number of pages24
JournalAnnual Review of Financial Economics
Volume9
DOIs
StatePublished - Nov 1 2017

Keywords

  • Capital structure
  • Cost of capital
  • Cost of debt
  • Cost of equity
  • Divisional cost of capital
  • Weighted average cost of capital

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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