Aswath Damodaran 313
Recapping the Measurement of cost of capital
! The cost of debt is the market interest rate that the firm has to pay on its
borrowing. It will depend upon three components
(a) The general level of interest rates
(b) The default premium
(c) The firm's tax rate
! The cost of equity is
1. the required rate of return given the risk
2. inclusive of both dividend yield and price appreciation
! The weights attached to debt and equity have to be market value weights, not
book value weights.
The cost of debt is the rate at which a business can borrow today.
