Still Many Ways to Skin a Capital Cost

Harvard Business Review

knew that firms were making heavy use of the capital asset pricing model (CAPM) to size up growth opportunities, but that the model was only as good as its inputs. But that article was written a decade ago, and still the CAPM rules — and as for how to come up with the crucial inputs to it, well, practice remains all over the map. Not at all, he said, because it's "no secret that applying the CAPM is as much an art as financial science." The same is true for the CAPM. ".

DCF 12

Why Sit on All that Cash? Firms Uncertain on Cost of Capital

Harvard Business Review

In estimating the cost of equity, nearly nine out of ten organizations use the capital asset pricing model (CAPM), which calculates the cost of equity using a risk-free rate, beta factor, and a market risk premium, each of which introduces significant variability. Budgeting Finance Strategic planning CAPMWith a record $2 trillion in cash and short-term liquid assets on hand, U.S. non-financial firms certainly seem poised to expand. What's holding them back?

What Private Equity Investors Think They Do for the Companies They Buy

Harvard Business Review

Furthermore, few PE investors explicitly use the capital asset price model (CAPM) to determine a cost of capital. Instead, PE investors typically target a 22% internal rate of return on their investments on average (with the vast majority of target rates of return between 20 and 25%), a return that appears to be above a CAPM-based rate. Such investments carry significant equity risk, suggesting that equity-based benchmarks like public market equivalents (PMEs) are appropriate.