Practitioners' perspectives on the UK cost of capital

McLaney, Edward; Pointon, John; Thomas, Melanie; Tucker, Jon

Abstract

The aims of this study were to determine how UK finance practitioners derive and review the cost of capital, and to ascertain whether the final figure varied with the choice of method. To investigate behaviour in the real world a survey questionnaire was employed, eliciting responses from the finance directors of 193 UK quoted firms. The results suggest that the cost of capital calculation is subject to wide variation across firms, both with regard to the overall figure and the precise computation of its components. The intuitive appeal of the WACC and CAPM approaches appears to ensure their continued popularity in the real world. However, firms tend not to make all of the adjustments to the overall figure which academics might expect, only making simple adjustments for risk and the tax advantage to debt. The after-tax money cost of capital which is approximately 10%, is Influenced by the choice of method, and firms do not appear to revise their overall cost figure rapidly in response to the environment. The cost of capital decision is of such strategic importance for the longer-term maintenance and expansion of firm value that it is nearly always made within the domain of the board of directors.

• Journal Article Type: Review
• Publication Date: Jan 1, 2004
• Journal: European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Taylor & Francis (Routledge)
• Peer Reviewed: Peer Reviewed
• Volume: 10
• Issue: 2
• Pages: 123-138
• DOI: https://doi.org/10.1080/1351847032000137401
• Public URL: https://uwe-repository.worktribe.com/output/1061041
• Publisher URL: http://dx.doi.org/10.1080/1351847032000137401