Corporate Financial Management in Facing Tax Changes

 

Here's a structured analysis on the Comparison of Capital Cost Measurement Methods Used by Companies:

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Title: Comparison of Capital Cost Measurement Methods Used by Companies

1. Introduction
The cost of capital is a fundamental metric in financial decision-making. Companies use different methods to measure it, each with varying levels of complexity and applicability depending on the company’s size, industry, and access to capital markets.

2. Common Capital Cost Measurement Methods

3. Comparison Summary

• WACC is most widely used in corporate finance due to its holistic view of capital structure.
• CAPM is the dominant model for estimating the cost of equity for publicly traded firms.
• DDM is simpler but limited to stable, dividend-paying firms.
• Bond Yield Plus Risk Premium and Build-up Methods are more practical for private firms or those without sufficient market data.

4. Practical Application by Companies

• Large Public Firms (e.g., Apple, Microsoft): Typically use WACC combined with CAPM for capital budgeting and valuation.
• Private Firms/Startups: Favor the Build-up Method or subjectively adjusted discount rates due to the absence of market data.
• Industries with Stable Dividends (e.g., Utilities): Often use DDM in combination with WACC.

5. Conclusion
No single method is universally superior; companies choose based on their characteristics, data availability, and strategic focus. A combination of methods often yields more accurate and reliable estimates of capital cost.