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The Corporate Cost of Capital and the Return on Corporate Investment
Author(s) -
Fama Eugene F.,
French Kenneth R.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00178
Subject(s) - cost of capital , return of capital , rate of return , return on investment , weighted average cost of capital , earnings , internal rate of return , investment (military) , return on capital , investment performance , business , return on capital employed , capital (architecture) , economics , implicit cost , monetary economics , corporate finance , finance , total cost , microeconomics , accounting , capital formation , financial capital , production (economics) , profit (economics) , archaeology , politics , political science , law , history
We estimate the internal rates of return earned by nonfinancial firms on (i) the initial market values of their securities and (ii) the cost of their investments. The return on value is an estimate of the overall corporate cost of capital. The estimate of the real cost of capital for 1950–96 is 5.95 percent. The real return on cost is larger, 7.38 percent, so on average corporate investment seems to be profitable. A by‐product of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns.