Digging into cost of capital and valuation multiples
There are several ways to calculate a cost of capital and especially to make the necessary assumptions and estimates. We present our own approach here.
PwC also excels at - among many other things - in disclaimers and caveats and we try to highlight the main pitfalls you could encounter when using the numbers shown here. Using these costs of capital or multiples as a basis for investment or any other decisions is probably best avoided.
The costs of capital shown in this page are estimated for broad industry sectors. Costs of capital differ between companies and this means that the costs of capital presented here probably are not applicable to every company or business in the given sectors.
Costs of capital are commonly used as discount rates for cash flows, especially in valuations of assets and whole businesses. One critical requirement for a successful valuation is that the assumptions and currency on which the cash flows are estimated should match the assumptions for the cost of capital. Additionally, if a certain risk has already been taken into account in the cost of capital, then that risk should not be embedded in the cash flow estimates to avoid double counting.
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