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Chapter Outline 12.1 The Cost of Equity Capital 12.2 Estimation of Beta 12.3 Determinants of Beta 12.4 Extensions of the Basic Model 12.5 Estimating International Paper’s Cost of Capital 12.6 Reducing the Cost of Capital 12.7 Summary and Conclusions What’s the Big Idea? Earlier chapters on capital budgeting focused on the appropriate size and timing of cash flows. This chapter discusses the appropriate discount rate when cash flows are risky. 12.1 The Cost of Equity Capital The Cost of Equity From the firm’s perspective, the expected return is the Cost of Equity Capital: Example Suppose the s