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ESTIMATING THE COST OF CAPITAL, A DIFFERENT APPROACH
Author(s) -
BIERMAN HAROLD,
ALDERFER CLAYTON P.
Publication year - 1970
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1970.tb00766.x
Subject(s) - cost of capital , cost of equity , economics , capital (architecture) , weighted average cost of capital , business , earnings , dividend , dividend policy , equity (law) , shareholder , marginal cost of capital schedule , finance , capital structure , microeconomics , economic capital , financial capital , individual capital , profit (economics) , capital formation , corporate governance , debt , archaeology , political science , law , history
If a firm is owned by one person, that person can directly indicate to management the cost of his capital. The determination of the stockholder's cost of capital of a publicly owned firm is more complex. Econometric studies using past earnings, dividends, and capital structure have been performed by Miller and Modigliani, Gordon and others to estimate the cost of equity capital. But the cost of capital is a function of investor expectations and only indirectly related to past operating results. The objective of the study was to estimate the cost of capital using information obtained directly from investors. Personal interviewing of the investors of specific firms would be more meaningful to the management of that firm, but this technique was not feasible; thus a mail questionnaire sent to a select group of investors was used. Conclusions are reached relative to the magnitude of the cost of equity capital of four selected firms as of May‐June of 1968, and several surprising and contrasting insights concerning dividend policy, that could have financial policy implications, are obtained. The desirability of the financial manager obtaining more information from investors is stressed.