A Losing Formula

One way CFOs can double-check the reasonableness of their cost-of-capital calculations, Grabowski says, is by comparing the number they get to a rough estimate based on the yield on the company's bonds (as opposed to Treasury yields) plus an average equity premium of, say, 4%, or perhaps more — maybe 7% for non-investment-grade companies.

"When you're done with your calculations, ask if the results make sense," he says. "During stable periods this may not be a difficult task, but at times like these, many companies may come up with nonsensical answers. Ask if your risk has changed. If it has, your cost of capital should be higher."

Randy Myers is a contributing editor of CFO.

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