Chris Sauter
Dr. Geyfman
April 2, 2015
Bruner Article This case, uses evidence through surveys, to find out how some of the best corporations and financial advisers calculate their cost of capital. This article is different from other studies because it leaves the questions open ended so respondents cannot just randomly pick answers and not give good feedback. This study is done over the telephone so that respondents answer anyway they want. All of the questions asked were similar but the responds differed. The other studies did not focus on one topic, and this one did, which was cost of capital. The weighted average capital cost (WACC) is the most widely used application, proved through this study. The WACC finds discount rates by using market value. The Capital Asset Pricing Model (CAPM) was mostly used for cost of capital calculations. This model describes the relationship between risk and expected return, which calculates the cost of risky securities. This is good for a company to follow because it sets a base to follow, and does not include opinions from the leaders of the company. Corporations, financial advisers, and the textbooks all agreed that they mostly use discounted cash flows when evaluating their investments. They also agreed to using the target, instead of current, and the market values, instead of book, for their current debt and equity standards. When estimating debt, before taxes, the majority went with the marginal cost factor. The tax rate, all three used, was the marginal or statutory tax rate. The historical average came in second for the tax rate corporations and financial advisers use. The risk free rate, volatility, and beta are all used consistently through the CAPM for all companies. The corporations, financial advisers, and textbooks did not agree on what risk free rate to use. The corporations said that they mostly used ten to thirty year treasuries, and the financial advisers used thirty year treasuries the most. On the other hand the textbooks stated that T-bills were best used for risk free rate. When using beta corporations mostly use published sources, while financial advisers use 7-7.4%. Corporations differ from financial
