CAPITAL COSTS TO SHRINK Elliott uses a hypothetical example: Assuming a cost of capital of 13 percent, he estimates this rate is composed of the following: 5.5 PERCENT RISK-FREE INTEREST RATE 4 PERCENT INFORMATION COST (information r isk) 3.5 PERCENT ECONOMIC RISK PREMIUM (business Information risk comprises approximately 30 percent of the cost of capital. Elliott believes the following factors will drastically reduce information risk in the next 5 to 10 years Advanced technology New accounting and auditing standards Auditors finding more efficient ways to audit Arens, Loebbecke; Auditing, 8/ o2000 br Prentice Hall. IncArens, Loebbecke; Auditing, 8/E © 2000 by Prentice Hall, Inc. CAPITAL COSTS TO SHRINK • 5.5 PERCENT RISK-FREE INTEREST RATE • 3.5 PERCENT ECONOMIC RISK PREMIUM (business risk) • 4 PERCENT INFORMATION COST (information risk) Elliott uses a hypothetical example: Information risk comprises approximately 30 percent of the cost of capital. Elliott believes the following factors will drastically reduce information risk in the next 5 to 10 years: Assuming a cost of capital of 13 percent, he estimates this rate is composed of the following: • Advanced technology • New accounting and auditing standards • Auditors finding more efficient ways to audit