The cost of capital concept has myriad applications in business decision-making.

The standard methodology for deriving cost of capital estimates is based on the seminal Modigliani-Miller analyses. This book generalizes this framework to include non-debt tax shields (e.g., depreciation), interactions between the borrowing rate and tax shields, and default considerations. It develops several new results and shows how better cost of capital and marginal tax rate estimates can be generated. The book's unified cost of capital theory is discussed with comprehensive numerical examples and graphical illustrations. This book will be of interest to corporate managers, academics, investment bankers, governmental agencies, and private companies that generate cost of capital estimates for public consumption. Contents:

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Model Setting Distributional Assumptions Model Solution Procedure Discussion of Results Extension to s x s States Numerical Illustration

Readership: Graduate courses in finance and economics, researchers, libraries, policy-makers, regulatory agencies, investment bankers, Wall Street firms. The cost of capital is one of the most important concepts in finance. Standard procedures for calculating it make a number of simplifying assumptions that often do not hold. This book derives the cost of capital under a quite general set of assumptions. It is a very useful contribution for both practitioners and academics. Franklin Allen Nippon Life Professor of Finance and Economics The Wharton School of the University of Pennsylvania, USA This book provides a very focused and thorough analysis of the firm's cost of capital. The authors use the contingent claim approach to evaluate the effect of taxes on the marginal cost of capital of the firm in a consistent and coherent way. I like this approach! Dan Galai Abe Gray Professor of Business Administration The Hebrew University of Jerusalem, Israel The concept of the firm's cost of capital is fundamental to capital budgeting decisions in modern corporations as well as investment decisions made by professional investors. This book provides a clear and concise exposition of how to incorporate the effect of taxes into cost of capital calculations thereby providing managers and investors with a more precise tool to estimate the firm's cost of capital. Frank Fehle Head of Europe Equity Research Barclays Global Investors, UK This book presents a clear and intuitive framework for cost of capital determination that explicitly accounts for the interactions between debt-equity level, cost of capital and firm value. A discerning practitioner should be able to use the insights from this book to analyze corporate financing decisions. Prafulla Nabar Head of Enterprise Valuation Group Lehman Brothers, USA Estimating the cost of capital is critical for finance professionals responsible for capital budgeting decisions. This work contributes to the body of knowledge so fundamental to the practice of financial decision making today. Alexander Frank Managing Director and Global Head of Institutional Operations Morgan Stanley, USA