Cost of Capital: Estimation and Applications

Pratt took his many years of valuation experience and put it in this one book. The book reviews the theory and practice of how to derive a discount rate for use in a DCF. At present, it's the best book in print for appraisers.

The valuation profession has exploded among CPAs, CBAs and others who attend a few seminars and then undertake to do this complicated work. Many end up doing a shabby job, because they do not understand basic concepts of cost of capital. The understanding of aspiring business appraisers will grow from reading this book, as (I believe) mine did.This book is NOT written by an academician (although I think I recall that Shannon has a PhD in finance). A fair example of an academician's work, reflecting a different approach and serving different needs, is Bradford Cornell's fine work on the equity risk premium.Pratt has authored several classic books on business valuation. He has valued thousands and testified in US Tax Court, state courts and federal courts across the country. He continues to speak to business appraisers across the country. This book summarizes issues he knows need to be better understood by those of us who consult with closely held businesses.This is a short book and an easy read, but packed with good information for those who want to better understand the cost of capital in the context of valuing small businesses.