An Examination of the Cost of Capital Implications of FIN 46

2012 ◽  
Vol 87 (4) ◽  
pp. 1105-1134 ◽  
Author(s):  
Carolyn M. Callahan ◽  
Rodney E. Smith ◽  
Angela Wheeler Spencer
Keyword(s):  
Comparative Analysis ◽  
Cost Of Capital ◽  
Balance Sheet ◽  
Equity Capital ◽  
Data Availability ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Variable Interest Entities ◽  
The Cost

ABSTRACT This study examines whether the adoption in 2003 of FASB Interpretation No. 46/R (FIN 46), Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51, changed the cost of 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 that FIN 46 significantly increased the cost of equity 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 off-balance 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 artificially reduce their cost of capital, a matter of regulatory concern. Data Availability: All data are available from public sources.

scholarly journals A Better Way To Measure The Cost Of Equity Capital For Small Closely Held Firms

2012 ◽  
Vol 10 (2) ◽  
pp. 97
Author(s):  
Denis O. Boudreaux ◽  
Praveen Das ◽  
Nancy Rumore ◽  
SPUma Rao
Keyword(s):  
Cost Of Capital ◽  
Average Rate ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Publicly Traded ◽  
Simple Method ◽  
Valuation Process ◽  
The Cost ◽  
Privately Owned

A companys cost of capital is the average rate it pays for the use of its capital funds. Estimating the cost of equity capital for a publicly traded firm is much simpler than estimating the same for a small privately held firm. For privately owned firms there is the lack of market based financial information. In business damage cases, valuation of the firm is often a prime interest. A necessary variable in the valuation process is the estimate of the firms cost of capital. Part of the cost of capital is the equity holders or owners required rate of return. The purpose of this paper is to explore the theoretical structure that underlies the valuation process for business damage cases that involve privately owned businesses. Specifically, cost of equity capital estimate methods which appear in the current literature are examined, and a theoretically correct and simple method to measure cost of equity capital for closely held companies is offered.

The Cost of Equity Capital in Stock Portfolios Listed on the Warsaw Stock Exchange Using the Classic CAPM

e-Finanse ◽  
2019 ◽  
Vol 15 (2) ◽  
pp. 48-62
Author(s):  
Stanisław Urbański
Keyword(s):  
Real Options ◽  
Stock Returns ◽  
Cost Of Capital ◽  
Stock Exchange ◽  
Bootstrap Method ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Warsaw Stock Exchange ◽  
The Cost

AbstractThis work is an attempt to estimate the cost of equity capital characteristic among portfolios of companies listed on the Warsaw Stock Exchange in the years 1995-2017. To this end, the classic CAPM is used to estimate the cost of risk. Model tests are based on 252 monthly returns. In order to assess the errors of cost of capital estimation, the bootstrap method is used. The estimated cost of capital refers to the project portfolio with real options on these projects. Stock returns are generated not only by the companies implementing projects but also through real options modifying these projects. The estimated cost of capital can be a valuable indicator for portfolio managers. Also, it can be an approximate indicator for making decisions on the implementation of new investment projects. The estimated cost of capital assumes the highest values for value portfolios. The estimated cost of capital assumes the small values for growth portfolios.

Are Banks Special?

2018 ◽  
Vol 08 (04) ◽  
pp. 1840004 ◽  
Author(s):  
Michel Crouhy ◽  
Dan Galai
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Market Conditions ◽  
The Cost ◽  
The Capital Structure

This paper addresses the following question: Are banks special firms that can achieve their goals only with high leverage, above and beyond what is considered acceptable for industrial corporations? This question is related to the issue of the cost of capital and how it is affected by leverage. If we accept the Modigliani–Miller (M&M) theorem (1958), then the capital structure is irrelevant for both the cost of capital and the value of the bank. Specifically, the M&M hypothesis argues that higher levels of equity capital reduce bank leverage and risk, leading to an offsetting decline in banks’ cost of equity capital. Hence, we ask the question whether banks are special firms such that M&M theorem does not apply to banks. We show that M&M propositions cannot be applied for banks primarily because of explicit guarantees and subsidies that provide incentives for increasing leverage. Then, some of the risk faced by the bank is transferred at no cost to the providers of these guarantees and subsidies, giving banks the incentive to increase leverage as much as they can. We show that under perfect market conditions, when risk is fairly priced, this opportunity vanishes.

scholarly journals The Role of Firms’ Life Cycle Stages on Voluntary Disclosure and Cost of Equity Capital in Brazilian Public Companies

2020 ◽  
Vol 17 (6) ◽  
pp. 601-620
Author(s):  
Paulo Victor Novaes ◽  
Jose Elias Almeida
Keyword(s):  
Life Cycle ◽  
Voluntary Disclosure ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Growth Stages ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Public Companies ◽  
Life Cycle Stages ◽  
The Cost

We examine the effects of firms’ life cycle stages on voluntary disclosure and the cost of equity capital. We also examine the relationship between the interaction of life cycle stages and voluntary disclosures measures on cost of equity capital. Our sample consists of non-financial Brazilian public companies, covered by analysts between 2008 and 2014, collected from I/B/E/S and Comdinheiro databases. We find that voluntary disclosure level is higher for firms in maturity and growth stages. We also find that firms in introduction and decline life cycle stages show higher implied cost of capital, however declining firms that increase voluntary disclosure reduce their cost of capital. Moreover, mature firms significantly reduce such inherent risk by reporting social and environmental voluntary information. Our results are useful for investors, practitioners, and regulators to the understanding of the incentives of voluntary disclosure practices.

scholarly journals A New And Better Way To Measure The Cost Of Equity Capital For Small Closely Held Firms

2011 ◽  
Vol 9 (1) ◽  
Author(s):  
Denis O. Boudreaux ◽  
Spuma Rao ◽  
Jim Underwood ◽  
Nancy Rumore
Keyword(s):  
Current Literature ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Font Size ◽  
Simple Method ◽  
Theoretical Structure ◽  
Valuation Process ◽  
The Cost

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; font-size: 10pt;">The purpose of this paper is to explore the theoretical structure that underlies the valuation process for small closely held firms.<span style="mso-spacerun: yes;">&nbsp; </span>Specifically, cost of capital estimate methods which appear in the current literature are examined, and a theoretically correct and simple method to measure cost of equity capital for privately held companies is offered.<span style="mso-spacerun: yes;">&nbsp; </span></span></p>

scholarly journals The effect of the board of directors’ characteristics on the cost of capital of the French companies

2009 ◽  
Vol 7 (1) ◽  
pp. 250-264 ◽  
Author(s):  
Daniel Zéghal ◽  
Raef Gouiaa
Keyword(s):  
Board Of Directors ◽  
Average Cost ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Cost Of Debt ◽  
Business Organization ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
The Board Of Directors ◽  
The Cost

The board of directors and the cost of capital play fundamental roles in the profitability and the perennity of any business organization. The objective of this research is to try to evaluate the effect of the board of directors’ characteristics on the cost of capital of the French companies. The results of this study, based on a sample of 87 French companies belonging to the French index SBF120 during 2005, show that the majority of the board of directors’ characteristics have an important and significant effect on the cost of equity capital, on the cost of debt and on the balanced average cost of capital of the French companies

Does Financial Constraint Affect the Relation between Shareholder Taxes and the Cost of Equity Capital?

2013 ◽  
Vol 88 (5) ◽  
pp. 1603-1627 ◽  
Author(s):  
Zhonglan Dai ◽  
Douglas A. Shackelford ◽  
Harold H. Zhang ◽  
Chongyang Chen
Keyword(s):  
Equity Capital ◽  
Data Availability ◽  
Tax Rates ◽  
Financial Constraint ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Partial Explanation ◽  
Shareholder Taxes ◽  
The Cost ◽  
Dividend Tax

ABSTRACT: We argue that reductions in shareholder taxes should lower the cost of equity capital more for financially constrained firms than for other companies. Consistent with this prediction, we find that, following the 1997 (TRA) and the 2003 (JGTRRA) cuts in U.S. individual shareholder taxes, financially constrained firms enjoyed larger reductions in their cost of equity capital than did other firms. The results are consistent with the incidence of the tax reductions falling mostly on firms with both pressing needs for capital and disproportionate ownership by individuals, the only shareholders who benefited from the legislations. The paper provides a partial explanation for the seemingly puzzling finding that, following the unprecedented 2003 reduction in dividend tax rates, non-dividend-paying firms outperformed dividend-paying firms. The results suggest that it was not dividend status that mattered, but financial constraint, a common attribute of non-dividend-paying companies. Data Availability: Data are available from public sources identified in the study.

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