Background Note | HBS Case Collection | November 2009

Business Valuation and the Cost of Capital

by Timothy A. Luehrman

Abstract

This note is an introduction to the cost of capital as used in discounted cash flow valuation analyses. The note covers basic financial economic principles and practical problems encountered in calculating the cost of capital, especially WACC. It concludes with cautionary advice about computing and applying WACC. The note is suitable for undergraduates, MBAs and executives studying basic cases on business valuation and capital budgeting.

Keywords: Economics; Capital Budgeting; Cash Flow; Cost of Capital; Valuation;

Citation:

Luehrman, Timothy A. "Business Valuation and the Cost of Capital." Harvard Business School Background Note 210-037, November 2009.