Shannon P. Pratt, CFA, FASA, ARM, MCBA, CM&AA, referred to as the father of business valuations, is the author of several bestselling Wiley business valuation books and a sought-after speaker at business valuation industry conferences. He is the managing owner of Shannon Pratt Valuations, Inc., and has served as supervisory analyst for over 3,000 business valuation engagements in forty years and as an expert witness in numerous state and federal courts on contested business valuations. Dr. Pratt is co-author of the upcoming Lawyer's Guide to Cost of Capital. Roger J. Grabowski is managing director of Duff & Phelps LLC. Roger has testified in court as an expert witness on the value of closely held businesses and business interests, matters of solvency, valuation, and amortization of intangible assets, and other valuation issues. He testified in the Northern Trust case, the first U.S. Tax Court decision that adopted the discounted cash flow method to value the stock of a closely held business with the discount rate based on the capital asset pricing model. Grabowski authors the annual Duff & Phelps Risk Premium Report and is co-author of the upcoming 2014 Valuation Handbook:Guide to Cost of Capital and co-author of the upcoming Lawyer's Guide to Cost of Capital.

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• About the Authors xiiiForeword xxiiiPreface xxvAcknowledgments xxixPART ONE Cost of Capital Basics 1CHAPTER 1 Defining Cost of Capital 3CHAPTER 2 Introduction to Cost of Capital Applications: Valuation, Project Selection, and Ratemaking 11CHAPTER 3 Net Cash Flow: The Preferred Measure of Economic Income 17APPENDIX 3A Alternative Measures of Economic Income 30CHAPTER 4 Discounting versus Capitalizing 36APPENDIX 4A Equivalency of Capitalizing Residual Income 56CHAPTER 5 Discounting—Beyond the Basics 60CHAPTER 6 Relationship between Risk and the Cost of Capital 70PART TWO Estimating the Cost of Equity Capital 89CHAPTER 7 Risk-free Rate 91CHAPTER 8 Equity Risk Premium 110APPENDIX 8A Deriving ERP Estimates 141APPENDIX 8B Other Sources of ERP Estimates 173CHAPTER 9 Build-up Method 177CHAPTER 10 Capital Asset Pricing Model 189CHAPTER 11 Beta: Differing Definitions and Estimates 202APPENDIX 11A Examples of Computing OLS Beta, Sum Beta, and Full-information Beta Estimates 225APPENDIX 11B Estimating Beta: Interpreting Regression Statistics 234CHAPTER 12 Unlevering and Levering Equity Betas 243CHAPTER 13 Criticism of CAPM and Beta versus Other Risk Measures 269APPENDIX 13A Example of Computing Downside Beta Estimates 298CHAPTER 14 Size Effect 301CHAPTER 15 Criticisms of the Size Effect 331APPENDIX 15A Other Data Issues Regarding the Size Effect 363CHAPTER 16 Company-specific Risk 372CHAPTER 17 Distressed Businesses 400APPENDIX 17A Cost of Capital and the Valuation of Worthless Stock 428CHAPTER 18 Other Methods of Estimating the Cost of Equity Capital 444CHAPTER 19 Using the Duff & Phelps Risk Premium Report Data 471APPENDIX 19A Examples Using the Duff & Phelps Risk Premium Report Data 499PART THREE Estimating the Overall Cost of Capital 519CHAPTER 20 Other Components of a Business's Capital Structure 521CHAPTER 21 Weighted Average Cost of Capital 544APPENDIX 21A Iterative Process Using CAPM to Calculate the Cost of Equity Component of the Weighted Average Cost of Capital 576PART FOUR Estimating the Cost of Capital—Non-Freely Traded Interests 609CHAPTER 22 Handling Discounts for Lack of Marketability and Liquidity for Minority Interests in Operating Businesses 611CHAPTER 23 Cost of Capital of Family Holding Company Interests 630CHAPTER 24 The Private Company Discount for Operating Businesses 650CHAPTER 25 Cost of Capital of Interests in Pass-through Entities 663CHAPTER 26 Relationship between Risk and Returns in Venture Capital and Private Equity Investments 680CHAPTER 27 Cost of Capital for Closely Held Businesses 693PART FIVE Corporate Finance Officers: Using Cost of Capital Data 711CHAPTER 28 Capital Budgeting and Feasibility Studies 713CHAPTER 29 Cost of Capital for Divisions and Reporting Units 722CHAPTER 30 Cost of Capital for Fair Value Reporting of Intangible Assets 757CHAPTER 31 Cost of Capital in Evaluating Mergers and Acquisitions 779CHAPTER 32 Cost of Capital in Transfer Pricing 793APPENDIX 32A Cost of Capital in Transfer Pricing Example 822CHAPTER 33 The Role of the Cost of Capital in EVA and in Corporate Value-Based Management 825PART SIX Other Cost of Capital Considerations 839CHAPTER 34 Estimating Economic Income 841CHAPTER 35 Minority versus Control Implications of Cost of Capital Data 861CHAPTER 36 How Cost of Capital Relates to the Excess Earnings Method of Valuation 873CHAPTER 37 Adjusting the Discount Rate to Alternative Economic Income Measures 881PART SEVEN Considerations in Special Applications 897CHAPTER 38 How Courts View Cost of Capital 899CHAPTER 39 Global Cost of Capital Models 1011CHAPTER 40 Cost of Capital of Real Property—Individual Assets 1052APPENDIX 40A Valuing Real Property 1076CHAPTER 41 Cost of Capital of Real Estate Entities 1084APPENDIX 41A Valuing Real Estate Entities 1122PART EIGHT Case Studies 1129CHAPTER 42 Cost of Capital for a Mid-Sized Company 1131APPENDIX 42A Report for Cost of Capital for a Mid-Sized Company 1138CHAPTER 43 Cost of Capital for a Smaller-Sized Company 1162APPENDIX 43A Report for Cost of Capital for a Smaller-Sized Company 1168PART NINE Advice to Practitioners 1179CHAPTER 44 Common Errors in Estimation and Use of Cost of Capital 1181CHAPTER 45 Advice on Dealing with Cost of Capital Issues 1199APPENDIX I Bibliography 1213APPENDIX II Data Resources 1239APPENDIX III Glossary of Cost of Capital Terms 1253About the Website 1266Index of Cases 1267Index 1271

Shannon P. Pratt, CFA, FASA, ARM, MCBA, CM&AA, referred to as the father of business valuations, is the author of several bestselling Wiley business valuation books and a sought-after speaker at business valuation industry conferences. He is the managing owner of Shannon Pratt Valuations, Inc., and has served as supervisory analyst for over 3,000 business valuation engagements in forty years and as an expert witness in numerous state and federal courts on contested business valuations. Dr. Pratt is co-author of the upcoming Lawyer's Guide to Cost of Capital. Roger J. Grabowski is managing director of Duff & Phelps LLC. Roger has testified in court as an expert witness on the value of closely held businesses and business interests, matters of solvency, valuation, and amortization of intangible assets, and other valuation issues. He testified in the Northern Trust case, the first U.S. Tax Court decision that adopted the discounted cash flow method to value the stock of a closely held business with the discount rate based on the capital asset pricing model. Grabowski authors the annual Duff & Phelps Risk Premium Report and is co-author of the upcoming 2014 Valuation Handbook:Guide to Cost of Capital and co-author of the upcoming Lawyer's Guide to Cost of Capital.

Select Guide Rating

• About the Authors xiiiForeword xxiiiPreface xxvAcknowledgments xxixPART ONE Cost of Capital Basics 1CHAPTER 1 Defining Cost of Capital 3CHAPTER 2 Introduction to Cost of Capital Applications: Valuation, Project Selection, and Ratemaking 11CHAPTER 3 Net Cash Flow: The Preferred Measure of Economic Income 17APPENDIX 3A Alternative Measures of Economic Income 30CHAPTER 4 Discounting versus Capitalizing 36APPENDIX 4A Equivalency of Capitalizing Residual Income 56CHAPTER 5 Discounting—Beyond the Basics 60CHAPTER 6 Relationship between Risk and the Cost of Capital 70PART TWO Estimating the Cost of Equity Capital 89CHAPTER 7 Risk-free Rate 91CHAPTER 8 Equity Risk Premium 110APPENDIX 8A Deriving ERP Estimates 141APPENDIX 8B Other Sources of ERP Estimates 173CHAPTER 9 Build-up Method 177CHAPTER 10 Capital Asset Pricing Model 189CHAPTER 11 Beta: Differing Definitions and Estimates 202APPENDIX 11A Examples of Computing OLS Beta, Sum Beta, and Full-information Beta Estimates 225APPENDIX 11B Estimating Beta: Interpreting Regression Statistics 234CHAPTER 12 Unlevering and Levering Equity Betas 243CHAPTER 13 Criticism of CAPM and Beta versus Other Risk Measures 269APPENDIX 13A Example of Computing Downside Beta Estimates 298CHAPTER 14 Size Effect 301CHAPTER 15 Criticisms of the Size Effect 331APPENDIX 15A Other Data Issues Regarding the Size Effect 363CHAPTER 16 Company-specific Risk 372CHAPTER 17 Distressed Businesses 400APPENDIX 17A Cost of Capital and the Valuation of Worthless Stock 428CHAPTER 18 Other Methods of Estimating the Cost of Equity Capital 444CHAPTER 19 Using the Duff & Phelps Risk Premium Report Data 471APPENDIX 19A Examples Using the Duff & Phelps Risk Premium Report Data 499PART THREE Estimating the Overall Cost of Capital 519CHAPTER 20 Other Components of a Business's Capital Structure 521CHAPTER 21 Weighted Average Cost of Capital 544APPENDIX 21A Iterative Process Using CAPM to Calculate the Cost of Equity Component of the Weighted Average Cost of Capital 576PART FOUR Estimating the Cost of Capital—Non-Freely Traded Interests 609CHAPTER 22 Handling Discounts for Lack of Marketability and Liquidity for Minority Interests in Operating Businesses 611CHAPTER 23 Cost of Capital of Family Holding Company Interests 630CHAPTER 24 The Private Company Discount for Operating Businesses 650CHAPTER 25 Cost of Capital of Interests in Pass-through Entities 663CHAPTER 26 Relationship between Risk and Returns in Venture Capital and Private Equity Investments 680CHAPTER 27 Cost of Capital for Closely Held Businesses 693PART FIVE Corporate Finance Officers: Using Cost of Capital Data 711CHAPTER 28 Capital Budgeting and Feasibility Studies 713CHAPTER 29 Cost of Capital for Divisions and Reporting Units 722CHAPTER 30 Cost of Capital for Fair Value Reporting of Intangible Assets 757CHAPTER 31 Cost of Capital in Evaluating Mergers and Acquisitions 779CHAPTER 32 Cost of Capital in Transfer Pricing 793APPENDIX 32A Cost of Capital in Transfer Pricing Example 822CHAPTER 33 The Role of the Cost of Capital in EVA and in Corporate Value-Based Management 825PART SIX Other Cost of Capital Considerations 839CHAPTER 34 Estimating Economic Income 841CHAPTER 35 Minority versus Control Implications of Cost of Capital Data 861CHAPTER 36 How Cost of Capital Relates to the Excess Earnings Method of Valuation 873CHAPTER 37 Adjusting the Discount Rate to Alternative Economic Income Measures 881PART SEVEN Considerations in Special Applications 897CHAPTER 38 How Courts View Cost of Capital 899CHAPTER 39 Global Cost of Capital Models 1011CHAPTER 40 Cost of Capital of Real Property—Individual Assets 1052APPENDIX 40A Valuing Real Property 1076CHAPTER 41 Cost of Capital of Real Estate Entities 1084APPENDIX 41A Valuing Real Estate Entities 1122PART EIGHT Case Studies 1129CHAPTER 42 Cost of Capital for a Mid-Sized Company 1131APPENDIX 42A Report for Cost of Capital for a Mid-Sized Company 1138CHAPTER 43 Cost of Capital for a Smaller-Sized Company 1162APPENDIX 43A Report for Cost of Capital for a Smaller-Sized Company 1168PART NINE Advice to Practitioners 1179CHAPTER 44 Common Errors in Estimation and Use of Cost of Capital 1181CHAPTER 45 Advice on Dealing with Cost of Capital Issues 1199APPENDIX I Bibliography 1213APPENDIX II Data Resources 1239APPENDIX III Glossary of Cost of Capital Terms 1253About the Website 1266Index of Cases 1267Index 1271