Yes cost of capital is important and indeed so is the required rate of return of the investor.
In my example.... what if the cost of capital was the same for each company? Which is worth more? If you do not include the cost of growth (ie the capex and increase in working capital) in your valuation aren't they worth the same? Does that make sense?
And now following....
Re Vocus: the growth capex matters because instead of giving the money to you as a shareholder they are (re)investing it other assets and hopefully earning a much higher return than you could on your own (hint: required rate of return vs return on capital). If the actual return on the investments the company makes are actually less than what an investor can do themselves.... then.... value has been destroyed from the perspective of the investor. In other words the company is spending money now to make even more money later. You need to account for both the outflow (capex) and the inflows (earnings).
After all when valuing a company what are you really trying to achieve?
You want use a valuation model to decide if the money you pay for a company today is less than the present value of the cash flows that the company will provide you in the future.
If a company spends money on a massive cable network for a new client that is money that you do not receive at that point in time (in fact, if it's a dud you won't see any of it). So why would you include it in your valuation as if you did? There's no such thing as a free lunch!
However, at a much later date you may receive an additional income stream based on the company's return on this investment. Which you definitely want to include in the company valuation.
And when a company retains money rather than distributing it to shareholders it believes that eventually this capital spend results in returns in excess that the investor could achieve personally.
Once a company stops re-investing profits the capital expenditure will revert back to a figure that is equal to maintenance capex (or depreciation if they have an honest accounting team). It's safer to use a number close (but risk-adjusted) to free cash flow as it will all be distributed if the company wishes no longer to grow. I would only extrapolate earnings out into perpetuity equations like this in cases where there is a sustainable competitive advantage.
