Business valuation and cost of capital

Abstract

In business valuation, valuation experts have subjective opinions over the calculation of cost of capital in a valuation model. One of the most contentious issues relating to cost of capital is credit risk or default risk for lending activities in capital markets, which is mainly reflected in cost of debt. Till date, there is no uniform view on how credit risk is assessed and used in the calculation of cost of debt. This research paper focuses on the reputable methodologies proposed by Damodaran and Duff and Phelps on deriving cost of debt and identifying how closely it aligns with disclosures in the Annual Reports for Listed Companies. [1st Award]