money jungle

McKinsey: The Finanical Crisis Hasn’t Increased the Cost of Capital

Posted in risk, theory by moneyjungle on December 11, 2008

In the latest McKinsey Quarterly, Richard Dobbs and Tim Kollar argue that the current financial crisis hasn’t increased the cost of capital. While the cost of long-term debt has risen in the past year, their data shows that (aside from junk bonds) it is still at historically low levels, due to the dramatic drop in interest rates that occurred after 9/11.

To assess cost of equity, they created a DCF model that relates changes in earnings to changes in share prices. By analyzing the behavor of consumer staples companies with stable earnings, they contend that the current drops in the market have increased the cost of equity by only half a percentage point.