An analysis of cost of capital, capital structure and capital budgeting practices: a survey of South African listed companies

Abstract

This study employs a sample survey to determine and analyse the corporate finance practices of South African listed companies in relation to cost of capital, capital structure and capital budgeting decisions.The results of the survey are mostly in line with financial theory and are generally consistent with a number of other studies. This study finds that companies always or almost always employ DCF methods such as NPV and IRR to evaluate projects. Companies almost always use CAPM to determine the cost of equity and most companies employ either a strict or flexible target debt‐equity ratio. Furthermore, most practices of the South African corporate sector are in line with practices employed by US companies. This reflects the relatively highly developed state of the South African economy which belies its status as an emerging market. However, the survey has also brought to the fore a number of puzzling results which may indicate some gaps in the application of finance theory. There is limited use of relatively new developments such as real options, APV, EVA and Monte Carlo simulation. Furthermore, the low target debt‐equity ratios reflected the exceptionally low use of debt by South African companies.

Citation

Correia, C. and Cramer, P. (2008), "An analysis of cost of capital, capital structure and capital budgeting practices: a survey of South African listed companies", Meditari Accountancy Research, Vol. 16 No. 2, pp. 31-52. https://doi.org/10.1108/10222529200800011