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Article
Publication date: 1 February 1990

Marjorie T. Stanley

The concept of a company's cost of capital is used in capital budgeting as a potential basic discount rate to be applied to expected future cash flows from a proposed…

Abstract

The concept of a company's cost of capital is used in capital budgeting as a potential basic discount rate to be applied to expected future cash flows from a proposed investment project being subjected to evaluation for acceptance or rejection. Discounted‐cash‐flow capital budgeting techniques derive from valuation theory that determines present value of expected future cash flows by discounting them down to the present at a discount rate appropriate to the degree of risk involved. Conceptually, this is true with regard to both domestic investment and foreign direct investment. However, there is recognition in the literature that capital budgeting for foreign direct investment decisions may involve complexities not present in the domestic case. These include economic, financial, and political factors, and related risks, e.g., foreign exchange risk, blocked currencies, expropriation. On the other hand, foreign direct investment is thought to provide diversification benefits, so that risks that are not domestically diversifiable are internationally diversifiable, thereby eliminating some otherwise systematic risk. Complexities such as these place a considerable burden upon the concept of cost of capital as a discount rate appropriately reflective of the degree of risk involved in a foreign direct investment project. Furthermore, cost of capital may be affected by environmental factors associated with what country the parent corporation calls “home” (Stonehill and Dullum).

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Managerial Finance, vol. 16 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 July 1999

Charles Ward

This paper introduces the ways of estimating the cost of capital. It briefly reviews the main theories of capital structure before explaining how the use of fixed‐interest…

Abstract

This paper introduces the ways of estimating the cost of capital. It briefly reviews the main theories of capital structure before explaining how the use of fixed‐interest debt finance might affect the cost of capital. It then considers ways of estimating the cost of equity and finally brings results together. Two final issues are considered: how the cost of capital can be used to appraise projects like the ones the firm is already undertaking; and how it can be used to consider projects that lie outside the normal range of business activities of the firm.

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Journal of Corporate Real Estate, vol. 1 no. 3
Type: Research Article
ISSN: 1463-001X

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Article
Publication date: 12 July 2021

Rim Zouari-Hadiji and Yamina Chouaibi

This paper aims to examine the effect of the corporate ethical approach on the cost of equity capital. This study is conducted on a large international sample on behalf of

Abstract

Purpose

This paper aims to examine the effect of the corporate ethical approach on the cost of equity capital. This study is conducted on a large international sample on behalf of the world’s most engaged firms from an ethical point of view in 2015.

Design/methodology/approach

The multivariate linear regression model is used to meet the purpose of this study and research hypotheses are also examined using a sample of 80 of most ethical firms in the world during the year 2015. Moreover, three variables (i.e. business ethics, corporate social responsibility and executive compensation based on the achievement of sustainable development goals) are used to reflect the corporate ethical approach and the implied cost of equity capital is used for estimating the cost of equity. In this regard, equity cost estimation is the most appropriate approach to test the effect of business ethics on the cost of financing firms.

Findings

Based on a sample of 80 firms emerging as the world’s most ethical firms in 2015, the results revealed that firms with better ethics scores are significantly associated with a reduced cost of equity capital. This paper also demonstrates that the executive incentive pays that are based on the objectives of sustainable development are able to explain different outcomes regarding the relation between corporate ethical behaviors and the cost of equity. These findings support arguments in the literature that firms with socially responsible practices have a higher valuation and lower risk.

Originality/value

This study provides implications for global regulators and policymakers when setting social reporting standards, suggesting that corporate ethical engagement reduces the cost of equity capital by decreasing the information asymmetry and thereby reducing the firms’ risk. Therefore, the findings may be informative to international managers and investors when considering the effect of business ethics on the firm’s ex-ante cost of equity. In this perspective, the voluntary disclosure of information makes it possible to mitigate the problems of asymmetry of information and conflict of interest between the firm and its main providers of capital, which could reduce the cost of equity.

Details

Journal of Financial Reporting and Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1985-2517

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Abstract

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Public-Private Partnerships, Capital Infrastructure Project Investments and Infrastructure Finance
Type: Book
ISBN: 978-1-83909-654-9

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Book part
Publication date: 13 December 2004

Robert Kee

Product mix and the acquisition of the assets needed for their production are interdependent decisions. However, these decisions are frequently evaluated independently of

Abstract

Product mix and the acquisition of the assets needed for their production are interdependent decisions. However, these decisions are frequently evaluated independently of each other and with conceptually different decision models. This article expands activity-based costing (ABC) to incorporate the cost of capital. The resulting model traces the cost of capital to products and thereby measures the economic value added (EVA) from their production. The discounted value of a product’s EVA over its life is equivalent to its net present value (Hartman, 2000; Shrieves & Wachowicz, 2001). The discounted EVA of a product also equals the net present value of the assets used to manufacture the product. Consequently, evaluating products with an ABC model incorporating the cost of capital enables product mix and capital budgeting decisions to be evaluated simultaneously. The article also examines the role of ABC when product mix decisions are made at the product and portfolio levels of the firm’s operations.

Details

Advances in Management Accounting
Type: Book
ISBN: 978-0-76231-139-2

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Abstract

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Public-Private Partnerships, Capital Infrastructure Project Investments and Infrastructure Finance
Type: Book
ISBN: 978-1-83909-654-9

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Article
Publication date: 1 January 1998

MIECZYSLAW DOBIJA

Progress in human resources accounting must continue to find a clear constructive definition of terms pertaining to human capital and human assets. The present paper is…

Abstract

Progress in human resources accounting must continue to find a clear constructive definition of terms pertaining to human capital and human assets. The present paper is comprised of considerations leading to the proposal of more general definitions of capital that involve human capital. As a complement to Fisher's concept of capital measurement, the present definition explains capital based on the capitalization process. Capitalization should be viewed as an essential attribute of capital. Human resources accounting (HRA) can benefit from improvements in the definition of certain terms related to human capital. Of particular importance is a proposal of a more general definition of capital. The definition leads to an alternative measure,which is more useful in the HRA field than the Lev‐Schwartz model. The proposed measure compliments Fisher's concept of capital measurement and utilizes a compound interest approach. Capital is perceived as a value of economic means capitalized in physical and human resources. The rate of capitalization is determined through natural and social conditions of the environment. The mode of capital measurement results from the above definitions. Moreover, the measure of human capital appears as a generalization of the historical cost concept. The valuation model of human capital involves capitalized costs of living, costs of professional education and value of experience measured by a slightly modified learning curve. Having human capital redefined and measured in these terms, we can introduce human resources into the balance sheet using a set of relevant journal entries.

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Journal of Human Resource Costing & Accounting, vol. 3 no. 1
Type: Research Article
ISSN: 1401-338X

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Article
Publication date: 7 September 2010

Naveed Iqbal Chaudhry and Muhammad Azam Roomi

The purpose of this paper is to examine empirically the impact of human capital development in organizations. It is based on some conceptual aspects of human resource…

Abstract

Purpose

The purpose of this paper is to examine empirically the impact of human capital development in organizations. It is based on some conceptual aspects of human resource accounting and considers how investments in the development of human capital can be measured in order to investigate the financial returns for organizations.

Design/methodology/approach

The study is exploratory in nature as this is the first of its kind in the Pakistani manufacturing sector. The technique of convenience sampling was used to collect the data due to time and resource limitations. The sample comprises of 30 leading companies in the Pakistani textile sector. A self‐administered postal questionnaire was designed for the research survey. The results focus on the benefits derived by using the capital investment appraisal techniques of human resource accounting including: return on investment, benefit to cost ratio, weighted average cost of capital, and bottom line evaluations.

Findings

The results provide evidence of an association between investment in the development of human capital and the benefits, which organizations can reap from such investments. It further finds that the organizations investing in training and development programs provide high employee productivity that ultimately contributes towards high‐organizational performance.

Research limitations/implications

Owing to the research design, the results may exhibit a lack of generalizability to other sectors. As the results cannot be applied to other organizations, further research can be done by using the same techniques.

Originality/value

This paper is a groundbreaking work in Pakistan and thereby an addition to the existing global literature on human resource accounting. This research provides new directions for the literature in this area, by encouraging a debate about the importance of investing in the development of human capital.

Details

Journal of Human Resource Costing & Accounting, vol. 14 no. 3
Type: Research Article
ISSN: 1401-338X

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Article
Publication date: 1 January 1977

Robin B. Fox

The amount of debt taken into a company's financial structure is one of the key financial decisions. When too much debt is taken on board, the company is risking technical…

Abstract

The amount of debt taken into a company's financial structure is one of the key financial decisions. When too much debt is taken on board, the company is risking technical bankruptcy if the company's cash inflow falls below the minimum level predicted. If too little debt is taken on, the company's cost of capital becomes unduly high compared with its competitors since it has failed to take advantage of the tax benefit from debt financing. The company's investment programme is impaired and the value of its equity falls on the stock exchange. This scenario might be described as the “conventional wisdom” of debt financing.

Details

Management Decision, vol. 15 no. 1
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 March 1976

Robin B. Fox

The amount of debt taken into a company's financial structure is one of the key financial decisions. When too much debt is taken on board, the company is risking technical…

Abstract

The amount of debt taken into a company's financial structure is one of the key financial decisions. When too much debt is taken on board, the company is risking technical bankruptcy if the company's cash inflow falls below the minimum level predicted. If too little debt is taken on, the company's cost of capital becomes unduly high compared with its competitors since it has failed to take advantage of the tax benefit from debt financing. The company's investment programme is impaired and the value of its equity falls on the stock exchange. This scenario might be described as the “conventional wisdom” of debt financing.

Details

Managerial Finance, vol. 2 no. 3
Type: Research Article
ISSN: 0307-4358

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