TABLE OF CONTENTS What we have to do is to be forever curiously testing new opinions and courting new impressions.
Walter Pater (1839 to 1894), 1873
In this chapter, from theoretical and practical points of view, we reexamine the cost of capital for valuing a finite cash flow stream, which is based on forecasted financial statements over the life of the cash flow. We emphasize and reiterate that the theoretical results for estimating and calculating the cost of capital are valid only under stringent conditions that might not hold in practice, especially in countries with shallow, illiquid, and incomplete capital markets. For example, in many countries the data for modeling and estimating the popular and well-known CAPM is not available. [1] Nevertheless, the conceptual framework of the CAPM is useful in thinking about and estimating a reasonable value for the cost of capital. For traded firms, we use the CAPM to provide guidance on the range of possible values for the cost of capital that are consistent with the market values. For non-traded firms, we use parameters from comparable traded firms to estimate a reasonable value for the cost of capital
From a practical point of view, it is most important for the analyst to assess the extent and degree to which it is acceptable to assume that the theoretical models are reasonable approximations to reality. And if the theoretical assumptions do not hold, the analyst must make appropriate, judicious adjustments...
