Intricacies Involved In Calculating Cost Of Capital- Case Study Of Dish Tv

Abstract

Cost  of capital is   a very fragile concept which need to be applied by the companies with due care after understanding  its assumptions and limitations.  The WACC is the usual method  for measuring  cost of capital. One has to ask a fundamental question as to whether, at all, a model is required to estimate cost of capital. In order to evaluate a  project, discounted cash flow method is  applied. There are no models to estimate  future cash flows, and managers have to depend on their experience and  expert advice. Why can’t the same approach be applied to estimate cost of  capital.It is irrational to have a model for developing cost of capital while estimating of fund flow is left to heuristics based on past data. Even in case of cost of capital, modeling started in 1960’s only.  The present case study tries to highlight  the intricacies involved in calculating cost of capital. At the end , one  should realize that  estimating cost of capital is  as much  an art as it is science. Applying rational models like CAPM without also resorting to business wisdom may lead to bizarre  consequences. After all, if things go wrong, one can’t blame the model. The onus is on the manager who applied those models to arrive at an objective figure to arrive at the cost of capital.