Ivo Welch
In a Modigliani-Miller (M&M) perfect capital market, the overall WACC remains the same regardless of capital structure. Mathematically, a capital structure with more leverage has a higher cost of debt and a higher cost of equity but tilts the weighting from higher-cost equity towards lower-cost debt. Of course, the Modigliani-Miller world is primarily a thought experiment.
When the capital markets are not perfect, firms can minimize … [ Read more ]
Content: Quotation | Author: Ivo Welch | Source: Management and Business Review (MBR) | Subject: Finance
Ivo Welch
Models like the CAPM assume perfect capital markets: All investors are alike and compete, so only the project characteristics matter. This view is often too simplistic. Instead, it seems that the CC depends on both project supply (their future cash flows) and project demand (available investor capital).
Content: Quotation | Author: Ivo Welch | Source: Management and Business Review (MBR) | Subject: Finance
Ivo Welch
The workhorse cost of capital (CC) model for nearly half a century has been the Capital Asset Pricing Model, or CAPM. It dominates textbooks, teaching, and practice. Over 90 percent of all publicly-traded companies use it. Courts and appraisers also use it. In many contexts, it is even the only accredited model. Unfortunately, the CAPM is not just imperfect; it is so badly wrong that … [ Read more ]
Content: Quotation | Author: Ivo Welch | Source: Management and Business Review (MBR) | Subject: Finance
The Cost of Capital: If Not the CAPM, Then What?
Twenty years ago, it would have been considered heresy to doubt the usefulness of the capital asset pricing model (CAPM) in assessing the cost of capital. Ivo Welch argues that, today, the CAPM should not just be doubted—it should be discarded.
Content: Article | Author: Ivo Welch | Source: Management and Business Review (MBR) | Subject: Finance