Estimating the Cost of Capital for Operating Assets

Abstract

A firm’s total assets include non-operating and operating components. In the conventional value-based management and economic value-added models, the value created comes from the firm’s operating assets; therefore, the weighted average cost of capital in the models should also be based on the operating assets instead of the total assets. A method to find this cost of capital is presented. This modification also has implications for other areas in the study of financial management, such as capital budgeting and capital structure.