Cost of Capital (Risk) Increased Again Last Week
Despite a fall in the cost of debt and common valuation multiples, like P/E or Price/Free Cash Flow, the cost of equity capital again rose this past week.
Many analysts and investment strategists have, over the weekend, quoted a low valuation multiple, as reason for hope of a quick equity market rebound. We doubt this will be the case as the cost of equity is a much more reliable indicator than the valuation multiple-think back to March, 2009, when financial markets rebounded as the cost of equity was falling, many months prior to an actual impact on those factors which reflect upon valuation measures.
It is difficult for us to understand why the credit measures we have been preaching for so long have not received more financial press, but are hopeful, when my text is released, devout followers will be reading more on the denominator of the discounted cash flow model. As we now so coldly see, earnings projections has its limits.
As written last week, neither earnings or free cash flow are as strong as being reported, and thus, combined with higher risk, is not conducive for an environment under which investors should feel confident regarding future distributions.
