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Cost of Capital Inputs Vary

Survey shows lack of standards

By staff Writer | Updated on March 14, 2011

U.S. businesses are sitting on a heap of cash, and as economic activity flows more freely, they’re expected to start spending that money. But the measures that companies use to assess possible transactions vary widely, according to a recent survey by the Association for Financial Professionals (AFP).

Discounted future cash flow, a standard measure for valuing possible acquisitions or divestitures, was employed by 79% of the more than 300 companies AFP surveyed, and by 91% of the companies that had more than $1 billion in revenue. But the survey shows that when companies calculate their weighted average cost of capital (WACC), the number used to discount the future cash flows, there are big differences in the numbers they use for such inputs as the risk-free rate, beta factor and the market-risk premium.

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