Cost of Capital

... 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 ...

The capital expenditure appraisal process has so far been presented in the framework of a cost benefit analysis where all benefits and costs are expressed in monetary values. However, many projects or programs undertaken by governments produce benefits that may be considered to be highly desirable but whose quantification in monetary terms is difficult if not impossible. Common examples of such projects are the provision of elementary school education, improvements in the provision of health care services, investment in public security and the administration of justice. In such cases, a full cost benefit analysis may not be feasible for each individual project or program but a costeffectiveness analysis (CEA) can be carried out. Such an analysis measures the quantities of benefits generated in terms of the number of units of the items produced, but no attempt is made to convert these into monetary values. This chapter outlines a methodology for conducting cost effectiveness analysis and discusses it usefulness and its limitations. Further extensions of cost effectives are made into topics of cost utility analysis, and the limitations of cost effectiveness.

This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

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...

Pro ject finance investments are a key backbone fo r a wide range of sustainable and bankable new infrastructures; being long term investments, they are highly exposed to inflation risk, which in Public Private Partnerships is mostly borne by the private counterpart and its backing lenders. Pro mpt mon itoring and resilient contractual design ease inflation risk detection, management and mitigation, together with proper and flexib le financial modelling, alleviating its potentially d isrupting impact, especially if unpredictable or chronically enduring.

This work assesses the main regulatory responses to the changes in the capital structure of the utilities firms. It examines the different means of influencing the capital structure and the various concerns related to high gearing; particularly in relation to the cost of capital and risk. The paper argues that several of those concerns are unfounded and that the effectiveness of various aspects of the regulation of capital structure and the setting of the cost of capital are highly questionable.

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 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) 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.

This paper examines the corporate governance of banks. When banks efficiently mobilize and allocate funds, this lowers the cost of capital to firms, boosts capital formation, and stimulates productivity growth. Thus, weak governance of banks reverberates throughout the economy with negative ramifications for economic development. After reviewing the major governance concepts for corporations in general, this paper discusses two special attributes of banks that make them special in practice: greater opaqueness than other industries and greater government regulation. These attributes weaken many traditional governance mechanisms. Next, the paper reviews emerging evidence on which govern-ment policies enhance the governance of banks and draws tentative policy lessons. In sum, existing work suggests that it is important to strengthen the ability and incentives of private investors to exert governance over banks rather than relying excessively on government regulators. These conclusions, however, are particularly tentative because considerably more research is needed on how legal, regulatory, and supervisory policies influence the governance of banks.

One of the practical problems faced by managers when choosing between alternatives (including whether or not to invest in a particular foreign project), is how to deal with the uncertainty of the outcome(s). The majority of textbooks split the methodology into three main streams. These can be summarized in the following way: representing the cash flows by their expected values and increasing the rate of return in order to outweigh the possibilities for unfavourable outcomes; expressing uncertainty related to the cash flows and applying the risk free discount rate; and finally a combination of the two - expressing uncertainty in the cash flows and discounting with a risk adjusted discount rate (RADR). In theory, it is proved that all three approaches to account for additional risk related to country specific characteristics can be applied interchangeably. Based on this concept, our research examined the hypothesis that the RADR method, containing Country Risk premium, can be applied as an equivalent of probability weighted scenarios (PWS) approach in a process of accounting for Country Risk in the expected Net Present Value (NPV) calculation for Foreign Direct Investment (FDI). The deliberate intervention on a micro scale has been identified as an appropriate approach in order to test the stated hypothesis.

The experiment was run on a sample taken from the FDI portfolio of oil and gas company, which consists of 24 investment cases performed in six countries. The results of this experiment support the hypothesis that, for the tested population, the RADR method is not an equivalent of the PWS approach and that both cannot be used interchangeably to account for Country Risk in the process of FDI appraisal.

The aim of the article is to describe how Estonian venture capitalists make financing and investment decisions, and compare these results with theoretical recommendations found in corporate finance and venture capital literature. The focus is on the methodological procedures in venture capital investment and financing. A case study approach is used to collect information about the current practice of venture capital investments and financing in Estonia. Five of the largest Estonian venture capital funds were analyzed in this article, and different problems have been presented in the article. Some of them require an academic and some a practical solution. The problems are divided into four parts: venture capital deal structuring, corporate governance and investor protection, the cost of venture capital and valuation.

New Zealand, the United States, and Chile had the best rankings regarding risk from political, commercial, war, or government actions and for the ease of doing business. Conversely, Venezuela, Indonesia, Colombia, and Argentina had high risk ratings, and Brazil, Indonesia, and Venezuela were ranked as more difficult countries for ease of business.

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.

We examine the NYSE and NASDAQ listing and delisting decisions of German companies in the context of the market segmentation and bonding theories. Both theories explicitly or implicitly assume that cross listing resulted in lower costs of capital and higher market valuations for the firms. However, using the same or similar research methods employed by those who have investigated and tested these theories, we find no systemic evidence that the German companies experienced reductions in their cost of capital or increases in their market values as a result of the cross listings. Our overall conclusion is that no significant valuation benefits were associated with the cross listings and that once Rule 12h-6 was adopted that enabled firms to delist without continuing to be subject to SEC regulations, many did so. Contributing to these decisions were changes in German corporate governance laws and the emergence of alternative trading platforms.

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 ...

Financing Constraints and Corporate Investment EMPIRICAL models of business investment rely generally on the assumption of a "representative firm" that responds to prices set in centralized securities markets. Indeed, if all firms have equal access to capital markets, firms' responses to changes in the cost of capital or tax-based investment incentives differ only because of differences in investment demand. A firm's financial structure is irrelevant to investment because external funds provide a perfect substitute for internal capital. In general, with perfect capital markets, a firm's investment decisions are independent of its financial condition. An alternative research agenda, however, has been based on the view that internal and external capital are not perfect substitutes. According to this view, investment may depend on financial factors, such as the availability of internal finance, access to new debt or equity finance, or the functioning of particular credit markets. For example, a firm's internal cash flow may affect investment spending because of a "financ-We are grateful to members of the Brookings Panel for helpful comments and suggestions and to Charles Himmelberg and Jaewoon Koo for excellent research assistance. Financial support from the Federal Reserve Bank of Chicago is acknowledged. Hubbard acknowledges support from a John M. Olin Fellowship at the National Bureau of Economic Research. The views expressed here are not necessarily those of the Federal Reserve Bank of Chicago.

This study examines whether adoption in 2003 of FASB Interpretation No. 46/R (FIN 46), Consolidation of Variable Interest Entities-an Interpretation of ARB No. 51, changes the cost of equity capital for affected firms. Using comparative analysis on a broad sample of 11,719 firm-quarter observations for 1,389 firms during the period 1998 through 2005, we find evidence FIN 46 significantly increased the cost of capital for firms with affected variable interest entities (VIEs), an increase of approximately 50 basis points relative to firms reporting no material effect from the standard. Further, firms consolidating these formerly offbalance sheet structures experienced the largest increase. Taken together, these results suggest that FIN 46 reduced the opportunity for firms to use off-balance sheet structures to reduce their cost of capital, a matter of regulatory concern.

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.

Research suggests that equity markets value Big N audits over non-Big N audits. Explanations include the information quality hypothesis, whereby Big N auditors increase information quality, and the insurance hypothesis, whereby investors value the deeper pockets of Big N auditors. Using client firms' ex ante cost of capital as the dependent variable, we investigate whether capital market participants differentially value Big 4 versus non-Big 4 audits in Australia and whether the value of Big 4 audits in Australia changed as a result of the audit failures of 2001-2002. We find that Big 4 audits reduce the ex ante cost of equity capital until 2001, but not after 2001. We cannot dismiss the insurance hypothesis for the persistence of the loss beyond 2003 because of the establishment of liability caps, but the demise of the Big 4 audit value for 2001-2003 is consistent with the information quality hypothesis and does not support the insurance hypothesis.

∎ 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 ...

We survey 290 LATAM firms on capital budgeting, cost of capital and capital structure issues. We analyze the results and compare them to those of other studies. We interpret differences according to special features characterizing both emerging markets and SME. We observe that LATAM firms make use of standard capital budgeting techniques, but give special weight to liquidity and capital rationing considerations. They rely less on cost of capital formal estimations; rather, they use investors' requests as their primordial input. Finally, surveyed firms are less leveraged, and inclined toward stressing the role of internal financing and minimizing payment commitments.

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 scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and

The present study is an attempt to find the relationship between capital structure and value of firm and to find the significance of differences in capital structures of different companies -inter and intra industry. Two hypothesis were framed and tested. bivariate correlation technique was used to find the nature of relationship between (i) capital structure and cost of capital, (ii) cost of capital and value of the firm and (iii) capital structure and value of the firm. Then, t-test was applied to test the significance of coefficient of correlation. Ftest was applied to test the significance of difference in capital structure. 30 companies listed on BSE Index were selected in the sample. The data for a 10 year period (2001-02 to 2010-11) are used. The main source of secondary data is Capitaline plus database. Seven companies have been excluded. Four of them are banks and three are excluded due to non-availability of data for the last 10 years. Primary data was collected through a questionnaire, mailed to the sample companies through post and e-mail. The questionnaires were sent to all 30 companies but since their response was poor, so the officials were contacted personally. In this manner, the data could be collected for a total 12 companies. The difference in capital structure of different companies whether they belong to the same industry group or different groups, was found to be statistically significant. This is because of the fact that qualitative values of the determinants of capital structure and their effect on value of the firm vary from company to company. Co-efficient of correlation between cost of capital and capital structure was found to be negative. The results support the view that increase in leverage decreases the cost of capital because debt is a cheaper source than equity. But the results are not statistically significant. This is because this relationship is affected by a number of factors, both quantitative and qualitative, whose effect on this relationship could not be isolated.

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 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 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.

Issues related to flows of goods and information are frequently discussed in the logistics and Supply Chain Management literature. But, only few contributions are exploring the financial flows associated with supply chains. This article reviews the state-of-the-art of research regarding financial flows in supply chains. In doing so, it becomes apparent that an explicit examination and optimisation of the cost of capital has been missing so far. In order to close this gap, a conceptual framework and a mathematical model of ''Supply Chain Finance'' is proposed.

We investigate the association of foreign share ownership with firm-level disclosure and corporate governance structures in Zimbabwe, a developing country in Southern Africa. Our motivation for the study derives from the literature, which suggests that foreign investors:

the Weighted Average Cost of Capital WACC calculation as: WACC = d(1-T)D% + eE% (1) Where d is the cost of debt before taxes, T is the tax rate, D% is the percentage of debt on total value, e is the cost of equity and E% is the percentage of equity on total value. All of them precise (but not with enough emphasis) that the values to calculate D% y E% are market values. Although they devote special space and thought to calculate d and e, little effort is made to the correct calculation of market values. This means that there are several points that are not sufficiently dealt with: Market values, location in time, occurrence of tax payments, WACC changes in time and the circularity in calculating WACC. The purpose of this note is to clear up these ideas and emphasize in some ideas that usually are looked over.

This paper focuses on the role of corporate financial strategies to improve their market valuations and lower their cost of capital. The identification of successful strategies is accomplished within an overall strategic framework. The paper is built on 12 longitudinal case studies from the Nordic countries to illustrate the linkages between business strategy, firm motivation, and various financial strategies. 

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.