1. come up with a better way to

1. A Better Way To Measure The Cost Of Equity Capital For Small Closely
Held Firms

Mr.  Denis O. Boudreaux, Mr. Praveen K. Das, Ms.
Nancy Rumore and Mr. S.P. Rao undertook a study to explore a valuation process
to calculate the cost of equity capital for Small Closely Held Firms. Most of
the models currently used involve lot of assumptions and information which is
not readily available for Closely Held Firms, giving inaccurate results. They
studied the two most common models- Build-up Model and the Discounted Cash Flow
(DCF) model- to come up with a better way to calculate the cost of equity
capital for Closely Held Firms called the “ORRR (Owners’ Required Rate of
Return) Model”. The ORRR Model is an improvement on the DCF model by
substituting the book value of equity for the market value of the equity.

                                         

  Where, CFI: operating cash flow to
investors =

               T:  firm’s tax rate                                  EQUITY: total common
stock equity on the balance sheet
               D: firm’s depreciation
expense             g: growth rate in the
firm’s free cash flows
               NFAI: net fixed asset
investment          P: debt principal
payment
               NCAI: net current asset
investment            
Thus the paper contributed towards development of a new and better methodology
for accurate calculation of cost of equity capital for Closely Held Firms.

 

 

2. Impact of Financial
Leverage on Cost of Capital and Valuation of Firm: A study of Indian Cement
Industry

Mr.
Sanjay J. Bhayani undertook a study to establish a link between the financial
leverage of a company and its cost of capital in the Indian Cement Industry.
The objectives of his study were to analyse and study the trend of financial
leverage and its impact on the average cost of capital, price-earning ratio and
the total valuation of the firm along with examining the correlation of
financial leverage with cost of capital, price- earning ratio and valuation of
the firm. The top nine companies in the cement industry, on the basis of their sales,
were taken as sample. Statistical techniques like mean, median and Karl
Pearson’s coefficient of correlation along with the t-test to test the
hypothesis were used. No significant relationship between the financial
leverage and any of the variables, namely cost of capital, price-earning ratio and
total valuation of the firm, could be established through the t-test. However,
it was found that cost of capital and financial leverage and price-earning
ratio and cost of capital jointly positively impact the total valuation of the
firm.

 

 

3. Cost of Capital and Profitability Analysis (A Case
Study of Telecommunication Industry)

The
paper by Ms. Asha Sharma talked about the impact of cost of capital on profit,
growth, investment and dividend decisions in the Indian industries,
specifically the telecommunication sector. In order to understand the impact of
the cost of capital on the various variables, financial tools like ratio
analysis along with statistical tools like averages, correlation coefficient
and regression analysis and t-test, F-test and Z-test to verify the hypothesis
were used. Bharti Airtel, one of the top telecommunication companies in India, was
taken as sample. Its cost of capital was calculated using the formula-

From
the study it was concluded that there exists

·        
negative
correlation between the cost of capital and profitability (lower the cost of
raising capital more will be the profit of the company),

·        
negative
correlation between cost of capital and liquidity (higher the liquidity of the
firm, the easier it is to raise capital, leading to a lower cost of capital as
it is theoretically true that investors prefer to invest in companies with
lower risk),

·        
negative
correlation between cost of capital and dividend (investors prefer current
dividend),

·        
positive
correlation between cost of capital and growth (requirement of funds increases
in the growing stages of a company).

 

 

4.
A Comparison of the Weighted Average Cost of Capital for MNCs: the case of
Automobile Industry versus the Soft Drinks Industry

The
following paper is a study of the weighted average cost of capital (WACC) in
the Automobile and the Soft Drinks Industries and how it differs based on the
country the company is set up in. Five companies in the soft drinks industry (Coca
Cola, Cadbury, Cott, National Beverage Corporation and Pepsico) and seven
companies in the automobile industry (Honda, Nissan, Toyota, Ford, GM,
Volkswagen and Daimler Chrysler) were analysed for the purpose of this study.

The
results showed a 3% difference in the WACC between Japanese and US companies in
the automobile industry. However, the WACC of companies in the soft drinks
industry seemed consistent across different countries. The four components of
WACC, namely the cost of debt, cost of equity, tax rate and the capital
structure, are affected by the Generally Accepted Accounting Principles (GAAP)
of the reporting country. The companies studied under the soft drinks industry
are from countries with similar GAAP and reporting standards and, therefore,
there was no significant change in the WACC of the companies in this particular
sector. The companies in the automobile industry, on the other hand, are from
countries following different reporting standards leading to variation in their
WACC.

 

 

5.
The Effect of SMEs’ Cost of Capital on Their Financial Performance in Nigeria

Mohammed
Ibrahim and Ali Ibrahim undertook this research to analyse the effect that cost
of capital has on the performance of Small and Medium Enterprises (SMEs) in
Nigeria. The study focused on the 11 SMEs listed on the Alternative Security
Market of the Nigerian Stock Exchange. Return on Assets (ROA) and Tobin’s Q
technique were used to measure the financial performance of the firms along
with the linear regression technique to test the hypothesis. It was found that
no significant relationship could be established between the cost of capital
and the financial performance of the firms. Thus a null hypothesis, which
states that there is no impact of cost of capital on the financial performance
of a firm, was accepted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCES

1.      Boudreaux, D. O., Das, P., Rumore, N., & Rao, S. (2012).
A better way to measure the cost of equity capital for small closely held
firms. Journal of Business & Economics Research (Online), 10(2),
97.

 

2.      Bhayani, S. J. (2009). Impact of financial leverage on cost
of capital and valuation of firm: A study of indian cement industry. Paradigm, 13(2),
43-49.

 

3.      Sharma,
A. (2012). Cost of capital and profitability analysis (A case study of
telecommunication industry). Journal of Commerce and Accounting
Research, 1(4), 42-50.

4.      McGowan, C. B., Tessema, A., & Collier, H. W.
(2004). A comparison of the weighted average cost of capital for multinational
corporations: the case of the automobile industry versus the soft drink
industry.

5.      Ibrahim, M., & Ibrahim, A. (2015). The Effect of
SMEs’ Cost of Capital on Their Financial Performance in Nigeria. Journal
of Finance and Accounting, 3(1), 8-11.