C. Management Determination of Appropriate Cost of Capital
Several studies examine the cost of capital for large firms (Gitman and Mercurio 1982, Jog and Srivastava 1995 ,and Oblak and Helm,Jr.1980) and other studies examine the approximate cost of capital facing large companies (Schall,Sundem,and Geijsbeek,Jr.1978 and Gitman and Forrester 1977) Oblak and Helm .Jr.1980 examine the cost of capital practices of multinationals and found weighted average cost of capital (WACC) was used by 54% of the respondents. Other measures cited in their study include the cost of debt ,past experience, expected growth rate, and CAPM. Jog and Srivastava 1995 found WACC to be used by 47% of Canadian firms ,but significant numbers of firms also use the other measures found in Oblak and Helm,Jr.1980. In academia, it is argued that WACC is the superior base level for cost of capital determinations. The following closed ended question was posed ; “In general,which of the following does your company consider to be the best discount rate?” The vast majority,83.2% chose WACC,while 7.4% chose the cost of debt,1.5% chose the cost of retained earnings,and 1.0% chose the cost of new equity. A minority 5.4% chose cost of equity for a project financed with equity and cost of debt for a project financed with debt and 1.5% indicated they had another measure for calculating the base discounrate.
C. Management Determination of Appropriate Cost of Capital Several studies examine the cost of capital for large firms (Gitman and Mercurio 1982, Jog and Srivastava 1995 ,and Oblak and Helm,Jr.1980) and other studies examine the approximate cost of capital facing large companies (Schall,Sundem,and Geijsbeek,Jr.1978 and Gitman and Forrester 1977) Oblak and Helm .Jr.1980 examine the cost of capital practices of multinationals and found weighted average cost of capital (WACC) was used by 54% of the respondents. Other measures cited in their study include the cost of debt ,past experience, expected growth rate, and CAPM. Jog and Srivastava 1995 found WACC to be used by 47% of Canadian firms ,but significant numbers of firms also use the other measures found in Oblak and Helm,Jr.1980. In academia, it is argued that WACC is the superior base level for cost of capital determinations. The following closed ended question was posed ; “In general,which of the following does your company consider to be the best discount rate?” The vast majority,83.2% chose WACC,while 7.4% chose the cost of debt,1.5% chose the cost of retained earnings,and 1.0% chose the cost of new equity. A minority 5.4% chose cost of equity for a project financed with equity and cost of debt for a project financed with debt and 1.5% indicated they had another measure for calculating the base discounrate.
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