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On the unavoidability of ‘unscientific’ judgment in estimating the cost of capital
Author(s) -
Thompson Howard E.,
Wong Wing K.
Publication year - 1991
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090120104
Subject(s) - dividend , cost of capital , capital (architecture) , economics , weighted average cost of capital , capital cost , econometrics , actuarial science , microeconomics , economic capital , finance , macroeconomics , individual capital , profit (economics) , archaeology , history
Estimating the cost of capital using DCF methods requires forecasting dividends. This paper shows that past dividend behavior may support more than one reasonable forecasting model and that reasonable forecasting models can lead to divergent estimates of the cost of capital. We find no way of selecting the best cost of capital estimate. Any choice must ultimately be based on ‘judgment’ of the analyst.