The third part of the book turns to estimation of a project's cost of capital in practice. Parts I and II have been about understanding how the cost of capital is determined. Part III is about methods by which we can measure what the cost of capital is.

The first two chapters, 12 and 13, consider methods of estimating the cost of equity of a listed company. The current chapter starts with a brief review of evidence on the methods used in practice. Most of the remainder is concerned with the implementation of procedures whereby the expected return on a share is inferred from the combination of its price and of forecasts of future cash pay-offs from the share. A long-standing method is to rearrange the dividend discount model of share value, and we consider this approach in some detail. More recently a method has been developed whereby the discount rate is inferred from the combination of the book value of the equity and of estimates of the company's future ‘abnormal earnings’.

Chapter 13, which follows, is also about methods of estimating the cost of equity of a listed company. It deals with the use of the standard CAPM for this purpose, and also with the implementation of three multifactor models of expected returns.

Chapter 14 is a guide to the estimation of the weighted average cost of capital of a project with no traded equity.