Session 1: The Cost of Capital Laying the Foundation. Aswath Damodaran. The essence of intrinsic value. In intrinsic valuation, you value an asset based upon its intrinsic characteristics.
where the asset has a n-year life, E(CFt) is the expected cash flow in period t and r is a discount rate that reflects the risk of the cash flows.
where CE(CFt) is the certainty equivalent of E(CFt) and rf is the riskfree rate.
Firm Valuation: Value the entire business
Equity valuation: Value just the equity claim in the business
Cost of equity is what equity investors require, given risk that they see in their investments.
The cost of capital is a composite cost of all financing, with the cost of debt reflecting the default risk that lenders perceive in the firm.