Cost of Capital Research Papers (original) (raw)

... Identifies the factors that affect current and future developments in food globalisation ... in the country of origin and, sanitary requirements including animal welfare or disease ... business process” although different... more

... Identifies the factors that affect current and future developments in food globalisation ... in the country of origin and, sanitary requirements including animal welfare or disease ... business process” although different organisations will develop different risk strategies, objectives and ...

This paper develops some results regarding the economic value added and real options. We use Merton's (1987) model of capital market equilibrium with incomplete information to introduce information costs in the pricing of real assets.... more

This paper develops some results regarding the economic value added and real options. We use Merton's (1987) model of capital market equilibrium with incomplete information to introduce information costs in the pricing of real assets. This model allows a new definition of the cost of capital in the presence of information uncertainty. Using the methodology in Bellalah (2001, 2002) for the pricing of real options, we extend the standard models to account for shadow costs of incomplete information. JEL Classification: G12, G20, G31 Keywords: EVA; Real options; Information costs I. INTRODUCTION Over the last two decades, a body of academic research takes the methodology used in financial option pricing and applies it to real options in what is well known as real options theory. This approach recognizes the importance of flexibility in business activities. Today, options are worth more than ever because of the new realities of the actual economy: information intensity, instantaneous...

This report estimates the returns that private investors in infrastructure projects in Latin America really made on their investments, and assesses the adequacy of these returns relative to the risks taken-the cost of capital-and the... more

This report estimates the returns that private investors in infrastructure projects in Latin America really made on their investments, and assesses the adequacy of these returns relative to the risks taken-the cost of capital-and the impact that the quality of regulation had on the closeness of alignment between returns and the cost of capital. This is done by estimating both historical and projected future returns earned by a sample of private infrastructure concessions, across a variety of Latin American countries and infrastructure sectors, and comparing them against expected returns given the level of risk taken-the cost of capital. In this way, it is possible to evaluate whether private investors did indeed earn abnormally high returns on their investments. The report develops a quality of regulation index and examines the extent to which the quality of the regulatory framework contributed to maintaining a closer alignment between rates of return and cost of capital, or did all...

This paper presents a formal derivation of general expressions for Ke and WACC in perpetuities with constant growth, which do not make any assumption on what the proper discount rate is to be applied to the firm’s tax shield, and are... more

This paper presents a formal derivation of general expressions for Ke and WACC in perpetuities with constant growth, which do not make any assumption on what the proper discount rate is to be applied to the firm’s tax shield, and are complemented with numerical examples of its application. Furthermore, because the most widely known approaches to market valuation of firm and equity make either an implicit or explicit assumption on the value the mentioned rate should take expressions for the value of the equivalent rate on each one of those cases are presented. In addition, a formula for the calculation of the impact on the firm and equity value of a variation on the discount rate for tax shield is proposed, which yields exact results for changes of any size.

This article advocates a new approach to assessing the desirability of downsizing. The model treats downsizing programs the same as any other projected investment by a firm. The steps involved in reaching a decision include: (a)... more

This article advocates a new approach to assessing the desirability of downsizing. The model treats downsizing programs the same as any other projected investment by a firm. The steps involved in reaching a decision include: (a) Estimation of cash outflows at the initial stage of the process regarded in this paper as the investment in the downsizing project; (b) Assessment of the net inflow from downsizing; (c) Estimation, on the basis of (a) and (b), the real, post-tax rate of return on the downsizing plan and comparison with the real, post-tax cost of capital to the firm; (d) Ranking and comparing the downsizing project to all other potential investments. The final decision of whether to accept or reject a downsizing plan will then depend on the relative desirability of the project (when all other non-quantitative considerations are also evaluated) to other investment alternatives, taking into consideration the limited resources of the firm for capital spending.

Cost of capital is one of the critical components in the financial performance of manufacturing firms. Manufacturing firms listed in Nairobi Securities Exchange have not been able to appropriately choose the right mix of cost of capital,... more

Cost of capital is one of the critical components in the financial performance of manufacturing firms. Manufacturing firms
listed in Nairobi Securities Exchange have not been able to appropriately choose the right mix of cost of capital, this has
negatively affected their financial performance, and hence there is a need to determine the relationship between cost of equity
and financial performance of listed firms in Nairobi Security Exchange, Kenya. The study was guided by Signaling and
Liquidity Risk Theory. The unit of observation was companies Listed in Nairobi Securities Exchange (NSE). According to
NSE there are 64 listed companies. The study purposively selected manufacturing firms that are listed at NSE. According to
NSE there are 8 manufacturing firms that are listed at NSE. The researcher collected secondary data from the audited annual
financial reports of 8 manufacturing firms listed in Nairobi Securities Exchange. The study used data collection sheet to assist
in data collection. Descriptive and inferential analysis was used in data analysis. From the findings the study concluded that
there is statistical significant relationship between cost of equity and financial performance of manufacturing firms listed at
the NSE. Finally the study concluded that the moderating role of firm size had no statistical significant effect on the
relationship between all the independent variable and financial performance of manufacturing firms listed in Nairobi
Securities Exchange however there were marginal changes in the coefficients of determination, when tested with firm size as
the moderating variable. From the conclusion the study recommended that manufacturing firms listed in NSE should use cost
of equity since it positively influence the financial performance.

Thomas Palley argues that the causes of the †œGreat Recession†are not primarily to be found in the asset bubble that was allowed to inflate in the housing market and in the financial sector. The bubbles actually reflect the... more

Thomas Palley argues that the causes of the †œGreat Recession†are not primarily to be found in the asset bubble that was allowed to inflate in the housing market and in the financial sector. The bubbles actually reflect the longer-term basis for stagnation that originate in the macro-economic structure of the US. He presents two major dimensions of these structural problems. The first problem is the entrenchment of a †œneoliberal†growth model that is hegemonic in the minds of politicians and the economics ...

Healthcare infrastructures are a typical risky investment, which can be financed in many different and competing ways, and Public Private Partnership and project financing techniques are increasingly recognized as a useful and appropriate... more

Healthcare infrastructures are a typical risky investment, which can be financed in many different and competing ways, and Public Private Partnership and project financing techniques are increasingly recognized as a useful and appropriate device. Risk identification, transfer, sharing and management are a key point of the whole structure and the risk matrix, used in order to classify and-wherever possible-measure risk is an unavoidable part of the investment package. To the extent that it can be professionally managed by specialized agents, risk sharing or transmission is not a zero sum game, even if risk pricing is never a trivial issue. While the public part traditionally bears core market risk (demand for health services), other key risks, such as those related to construction and management of commercial (hot) activities, are typically transferred to the private part, often represented by a private entity. A corporate finance perspective is crucial for preparing a proper business model, where economic and financial flows are projected along the time span of the investment, with managerial and strategic insights for not ephemeral sustainability. Capital structure issues, rotating around (optimal) leverage, are eventually discussed, starting from a Modigliani & Miller framework, with practical insights and sensitivity analyses.

∎ In recent decades, theoretical breakthroughs in such areas as portfolio diversification, market efficiency, and asset pricing have converged into compelling recommendations about the cost of capital to a corporation. By the early 1990s,... more

∎ In recent decades, theoretical breakthroughs in such areas as portfolio diversification, market efficiency, and asset pricing have converged into compelling recommendations about the cost of capital to a corporation. By the early 1990s, a consensus had emerged prompting such ...

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In this paper we investigate to what extent tax incentives are effective in attracting investment in Sub-Saharan Africa. We test the neo-classical investment theory prediction that tax incentives, by lowering the user cost of capital,... more

In this paper we investigate to what extent tax incentives are effective in attracting investment in Sub-Saharan Africa. We test the neo-classical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment. Next to tax incentives, we also estimate the impact on investment of other investment climate variables that are under direct control of the government, such as the transparency and complexity of the tax system, and the legal protection of foreign investors. In developing countries these variables might be as important as or even more important than the tax variables themselves. Therefore, we analyze the policy changes in tax incentives and in the other investment climate variables for 12 CFA Franc Zone countries over the period 1994–2006. Because of their common currency (the CFA Franc) and common language (French) these countries constitute an exceptional basis of comparison to evaluate their ‘policy experiments’. The use of panel data econometrics with fixed country and year effects allows us to isolate the impact of the policy changes on investment, as if it were a difference in differences analysis with multiple policy changes. We find no robust positive relationship between tax holidays and investment in the CFA Franc zone. However, increasing the number of legal guarantees for foreign investors and reducing the complexity of the tax system helps to attract investment.

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms' ex ante cost of equity, we find that firms with better CSR... more

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms' ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and

The authors report the results of a study on the motives of corporate headquarters in large European manufacturing firms for engaging in outsourcing and the risks they perceive to be associated with strategic outsourcing operations. Four... more

The authors report the results of a study on the motives of corporate headquarters in large European manufacturing firms for engaging in outsourcing and the risks they perceive to be associated with strategic outsourcing operations. Four main issues can be highlighted: preoccupations about core businesses and reduction of cost of capital are linked; access to external expertise and quality improvements

Dividend policy is a vital part of a corporate’s financing decision. This dividend-payout policy will determine the amount of earnings that can be retained in the firm as a source of financing (Horne & Wachowicz, 2008). Over the past 40... more

Dividend policy is a vital part of a corporate’s financing decision. This dividend-payout policy will determine the amount of earnings that can be retained in the firm as a source of financing (Horne & Wachowicz, 2008). Over the past 40 years, financial theorists have debated the extent to which dividend policy should and does matter to a firm’s market value and thus its shareholders. One group of theorists believe that dividend policy is irrelevant to shareholders, through the company’s market value...

The present study attempts to examine the relationship of EVA and MVA with Cost of Capital in Hindustan Unilever Limited. The study is based on secondary data from 2009-10 to 2015-16. The results reveal that the values of EVA and MVA are... more

The present study attempts to examine the relationship of EVA and MVA with Cost of Capital in Hindustan Unilever Limited. The study is based on secondary data from 2009-10 to 2015-16. The results reveal that the values of EVA and MVA are positive and declining trend in WACC during the period of the study. It means company has succeeded in creating more firm's value and fulfill the goals of wealth maximization of the shareholders and minimize the cost of capital. The coefficient of correlation values are .94,-.93 and-.27 between EVA and MVA, WACC and EVA, WACC and MVA respectively. The study proves that the cost of capital (WACC) has an effective influence on EVA and low on MVA. The findings of this paper may be useful to make an efficient financial strategy, assess firm's value and to judge the financial performance of the company. Keyword:-EVA, MVA, WACC and Shareholders Wealth Creation. Introduction The goal of financial management is to maximize the shareholder's value. It can be achieved by the maximum utilization of capital employed in the business. The manager of the firm (as an internal user) and the investors and other parties (as an external user) are interested to use an appropriate performance measure. The performance measurement depends upon at least three things i.e. amount of capital invested, the return on the capital and cost of capital. Otherwise, it will not increase the shareholder's wealth. The companies have adopted different modes of measurement of corporate financial performance such as return on equity, return on capital employed, earnings per share, dividend per share, operating profit margin, economic value added,market value added and shareholder value added, etc. Out of these, the familiar and most prominent methods adopted by the Indian companies are economic value added and market value added. The study is an attempt to examine the relationship of EVA and MVA with Cost of Capital in Hindustan Unilever Limited.

يهتم هذا البحث بدراسة مشكلة تكلفة رأس المال والصعوبات المرتبطة بها بهدف توضيح أهمية حساب تكلفة رأس المال فى المشروعات الاستثمارية لترشيد استخدام الأموال وتحقيق قدر متوازن من الاستقرار والاستدامة في المجتمع. وتحدد إطار الدراسة في تحقيق... more

يهتم هذا البحث بدراسة مشكلة تكلفة رأس المال والصعوبات المرتبطة بها بهدف توضيح أهمية حساب تكلفة رأس المال فى المشروعات الاستثمارية لترشيد استخدام الأموال وتحقيق قدر متوازن من الاستقرار والاستدامة في المجتمع.
وتحدد إطار الدراسة في تحقيق فرض أساسي وهو: "أهمية عامل الوقت فى تكوين رأس المال واستخدامه وتنميته". وتم تحليل الفرض إلى عدد من التساؤلات قسمت فى مجموعتين، المجموعة التي قد تشكل عوامل سلبية لأهمية عامل الوقت، والمجموعة التي تؤكد أهميته. ومن تحليل إجابات المجموعتين توصلت الدراسة إلى صحة الفرض الأساسي وأنه لا خلاف بين أحكام الشريعة الإسلامية والمفاهيم العلمية في أهمية عامل الوقت فى تكوين رأس المال واستخدامه وتنميته، حيث تهتم الشريعة بعامل الوقت عند التصرف فى الأموال بفرض نسبة الزكاة من الأموال المدخرة سنويا ، وإباحة الكسب من البيع الآجل وهو زيادة نظير الأجل. كما استخدم لفظ البيع المباح عند التفرقة بينه وبين حرمة الربا بإعجاز قرآنى ليعبر عن الدافع والغاية لاستخدام رأس المال وهما وجهي العملة لكل أنواع الاستثمار، حيث يتحقق البيع الأرباح للمستثمر والإشباع للمستهلك في درجات متطورة من الإنتاجية والرفاهية للمجتمع. وحرم الربا بسبب أنه مجرد تبادل نقد بنقد وزيادة دون مقابل من خدمات أو منافع للطرفين ويؤدي إلى انفصال دورة النقود وزياداتها عن دورة الإنتاج والاستثمار والبيع وإشباع الحاجات للفرد والمجتمع بما يعوق دافع الاستثمار ولا يحقق غايته. كما توصلت الدراسة إلى إمكانية تطبيق أحكام الإجارة فى الشريعة لاستخدام رأس المال النقدي فى المشروعات مقابل الخدمات والمنافع التي يساهم بها كعنصر من عناصر الإنتاج. ويحسب الأجر كتكلفة لكل رأس المال الممول للمشروع، سواء التمويل المخاطر بالملكية أو التمويل المؤقت بالاقتراض. وتخصم تكلفة التمويل من الإيرادات مع كل التكاليف الأخرى قبل التوصل للربح. وبسبب الطبيعة التمويلية الخاصة برأس المال، لا تدفع تكلفته لأصحاب الأموال إلا بعد تحقق الإيرادات من البيع، ويكون للتمويل المؤقت الأولوية إذا لم تغطي الإيرادات كل تكاليف التمويل، وفى حالة الخسارة ترحل تكلفة التمويل لرأس المال المملوك والمؤقت إلى سنوات الربحية. وبحساب ودفع تكلفة رأس المال النقدي تقوم المشروعات النمطية التي تحقق إشباع الحاجات الحالية من السلع والخدمات والاستقرار للمجتمع. ويتحقق الربح من إدارة المخاطر في المشروعات الرائدة. واقترحت الدراسة تشكيل هيئة في مجتمعية بفروعها المتخصصة لتقييم نتائج الاستثمارات ومراقبة الحدود بين تكلفة رأس المال والربح الذي يكون من حق كل العناصر المتعاونة في تحقيقه بما فيهم حق رأس المال المخاطر وحق المجتمع.