Weighted Average Cost Of Capital Research Articles

Higher cost of finance exacerbates a climate investment trap in developing economies

Finance is vital for the green energy transition, but access to low cost finance is uneven as the cost of capital differs substantially between regions. This study shows how modelled decarbonisation pathways for developing economies are disproportionately impacted by different weighted average cost of capital (WACC) assumptions. For example, representing regionally-specific WACC values indicates 35% lower green electricity production in Africa for a cost-optimal 2 °C pathway than when regional considerations are ignored. Moreover, policy interventions lowering WACC values for low-carbon and high-carbon technologies by 2050 would allow Africa to reach net-zero emissions approximately 10 years earlier than when the cost of capital reduction is not considered. A climate investment trap arises for developing economies when climate-related investments remain chronically insufficient. Current finance frameworks present barriers to these finance flows and radical changes are needed so that capital is more equitably distributed.

Does it pay to be environmentally responsible? Investigating the effect on the weighted average cost of capital

AbstractThis research aims at investigating the effect of firms' environmental policies on the weighted average cost of capital (WACC) in order to catch capital markets' reaction towards corporate environmental commitment and effectiveness in reducing carbon emissions. We refer to the European market and analysed a sample of companies listed on the Stoxx Europe 600 Index during the timeframe 2014–2018. Our results show that capital markets have become particularly sensitive to environmental issues and therefore reward environmentally virtuous firms with a lower after tax WACC. We also argue that this effect is prominent for both high emitting and low emitting industries.

A Study on the Effect of Cost of Capital on Profitability of a company

The Cost of Capital plays a significant role in capital budgeting decisions and is also used as a financial standard. The Weighted Average Cost of Capital (WACC) caters to the need to have a single rate, which helps to analyze and compare the cost of different sources of funds. It is important for all companies to understand the relationship between the cost of capital and its profitability to take proper care of the cost of capital to ensure a favorable financial situation in the company. The use of a statistical method such as correlation in understanding the relationship is systematic and scientific, which will provide better insight for future decision making. This paper undertakes to study the relationship between the cost of capital and profitability of Ports And Special Economic Zone Limited.

The Modigliani–Miller Theory with Arbitrary Frequency of Payment of Tax on Profit

The main purpose of the current study is the generalization and further development of the Modigliani–Miller theory taking into account one of the conditions of the real functioning of companies for the case of paying income tax with an arbitrary frequency (monthly, quarterly, semi-annual or annual payments). While a return is not required more than once a year, businesses may be responsible for filing estimated taxes based on profits earned. This requirement is dependent on showing a profit. For example, sole proprietors must file estimated taxes on profits quarterly, on the 15th day of April, June, September and January. In Russia, tax on profit payments could be made annually, quarterly, or monthly. We suppose, that more frequent payment of income tax impacts on all main financial indicators of the company and leads to some important consequences. We use analytical and numerical methods: we derive all main formulas of the modified Modigliani–Miller theory theoretically and then use them to obtain all main financial indicators of company and their dependences on different parameters by MS Excel. We show that: (1) all Modigliani–Miller theorems, statements and formulas change; (2) all main financial indicators, such as the weighted average cost of capital (WACC), company value, V, and equity cost, ke, depend on the frequency of tax on profit payments; (3) in the case of income tax payments more than once per year (at p≠1), as takes place in practice, the WACC, company value, V and equity cost, and ke start depend on debt cost, kd, while in ordinary (classical) Modigliani–Miller theory all these values do not depend on kd; (4) obtained results allow a company to choose the number of payments of tax on profit per year (of course, within actual tax legislation): more frequent payments of income tax are beneficial for both parties, for the company and for the tax regulator.

How to Value Private Companies using Multiples and Discounted Cash Flow Analysis

In this paper we outline how to value private companies and work through a real case study. The corporate finance and valuation techniques on display can be used to value any private company or project that is illiquid with little or no market data. Together with this paper we provide the full background information for the case study, including consolidated balance sheet, cash flow and income statements and an Excel workbook with a full valuation breakdown . Two valuation approaches are presented. The first approach is called ‘multiples’ and requires we first identify sensible comparable companies with public data and can serve as a reasonable proxy for our underlying firm or project. Known proxy enterprise values are converted into multiples of EBITDA and extrapolated to value the private company or project of interest. Enterprise value can be measured as a multiple of sales, earnings, EBITDA, EBIAT and many income factors. Typically practitioners measure enterprise value as a multiple of EBITDA to exclude sales margin, capital structure, debt and leverage and other idiosyncratic biases. The second valuation method takes a discounted cash flow (DCF) approach. This approach is forward looking; it projects and values the future cash flows of a company. This method lends itself to richer analysis compared to the multiples approach, but relies heavily on assumptions surrounding cash flow projections, growth rates and the weighted average cost of capital (WACC). The WACC acts as a yield or discount factor and is required to value the cash flows of the firm or project (Burgess, 2020). Finally we compare the prices from several different approaches to arrive at a suitable price range. It is important to note that all approaches involve assumptions and approximations of some kind. Therefore practitioners seek to establish a reasonable price range rather than a single price. Transactions however must take place at a single price and law suits are a popular commonplace negation tactic to squeeze for additional value.

Analyze Return on Equity and Weighted Average Cost of Capital Linkages to Firm Value

The company's stock price which always experiences a decline is the background of this research. This study aims to determine the effect of return on equity (ROE) and Weighted Average Cost of Capital (WACC) on firm value in the textile and garment sector which is listed on the Indonesia Stock Exchange. This study using secondary data from is Financial statements of textile and garment companies from 2013 to 2018 obtained through the website Indonesia Stock Exchange. The analytical method used is multiple linear regression and data analysis using IBM Statistics 26. Based on the result of the analysis it can be concluded that return on equity and weighted average cost of capital has a significant effect on firm value with R2 equal to 0,329, which means the contribution of the independent variable to firm value by Price book value (PBV) in textile and garment companies is equal to 32,9 % and the remainder equal to 68,1 % can be explained by other variables outside this study, and based on the value of F with the values 6.606 shows that the simultaneous correlations of independent variables namely ROE and WACC with the dependant variable firm value.

Financing costs and barriers to entry in Australia’s electricity market

PurposeThis paper aims to provide investors’ views on financing costs and barriers to entry into the electricity generation sector, with a focus on investors’ views on potential impacts on cost of capital from adopting nodal pricing and financial transmission rights (FTRs). The implications for policymakers and policy reforms are also discussed in detail.Design/methodology/approachSurvey-based data collection of investors and developers in electricity generation, consisting of multiple choice questions from a closed list of discrete choices, binary-choice questions, and questions with free-text/open-ended answers.FindingsAcross survey respondents, weighted-average cost of capital (WACCs) were broadly unchanged over 2019, with increases for undiversified/non-integrated participants offset by decreases for horizontally integrated participants. Cost of equity has risen, whereas cost of debt has fallen. Nodal pricing-cum-FTRs were estimated to increase WACCs by 150–200 basis points p.a. (15–20%), reflecting concerns around the firmness of FTRs and ability to automatically access intraregional settlement residues.Research limitations/implicationsThese findings have energy policy implications, namely, the need to consider the interaction between economic theory and real-world financing models when designing and implementing fundamental energy sector reforms.Practical implicationsThe need to consider implementation and transitional issues (e.g. grandfathering of existing rights, focusing on reducing the largest barriers to entry) is associated with implementing nodal pricing.Originality/valueUnique set of survey questions and insights that have not previously been addressed in an Australian context; what-if analysis not previously done in an Australian context

Energy Sector Risk and Cost of Capital Assessment—Companies and Investors Perspective

This paper aims to identify the costs of capital in a group of companies from the energy sector by including an investor and market risk approach. The study also concerns the company’s Weighted Average Cost of Capital (WACC) cost intra-industry analysis related to sector characteristics such as total assets, revenues, market capitalization, and companies’ age. In order to assess the intergroup relationships, basic correlation relationships were compared and a nonparametric test of variance was performed. The period under study covered the years 2015–2019. The conducted research evaluates groups of companies that dedicated their activity to a particular energy intra-industry division under numerous regulations in Europe. The study contributes to assessing the level of risk among energy listed companies in European capital markets based on capital structure valuation. The study results underline the role of the cost of equity financing, which was twice as high as the cost of debt. The highest WACC was related to the Beta indicator that also expressed the political and regulatory risk over the investigated period. Across debt cost analysis, the role of effective tax rate decreased the level of WACC. The highest level of WACC was noticed among uranium and integrated oil and gas companies. The study contributes to information asymmetry theory related to the cost of capital assumptions.

STRATEGY FOR THE FORMATION OF OPTIMAL CAPITAL STRUCTURE WITH SWOT ANALYSIS IN PHARMACEUTICAL SUBSECTORS COMPANIES

<p><em>This study aims to determine the optimal capital structure formation in pharmaceutical sub-sector companies during the period 2014 - 2019 by analyzing profitability, dividend policy, and the SWOT matrix model by analyzing strengths, weaknesses, opportunities, and threats and being the basis for formulating various alternatives. These strategies can be carried out by company management. The company's profitability is not optimal; the company can still distribute dividends. And the results of the study illustrate that the capital structure of the pharmaceutical sub-sector company is not yet optimal. The average proportion of long-term debt capital structure of pharmaceutical sub-sector companies is 18.43% debt and 81.57% equity. Calculation of company value from 2014 - 2019 using the Modigliani Miller approach with a debt proportion of 0% - 100% shows that the highest company value of pharmaceutical sub-sector companies is in the composition of 30% debt and 70% equity. The total WACC averages 47% of the debt. By producing a WACC of 1.92% - 16.89% with a total average WACC of 10%. By considering the WACC, it is concluded that the optimal capital structure for the average pharmaceutical sub-sector company is in the composition of 30% to 60% of the debt.</em><em> </em><em>Meanwhile, the average WACC is 11.10%, and with financial distress, the average WACC value is 10%. Based on considering the company value and WACC above, the capital structure of the pharmaceutical sub-sector company is not optimal. The optimal capital structure will result in high Firm Value and the lowest cost of capital. The results of this study have implications for financial performance, capital structure, firm value, the weighted average cost of capital (WACC), and SWOT analysis, which need to be optimized to achieve optimal capital structure.</em><em></em></p>

Internal rates of return and shareholder value creation

We propose a genuinely internal approach to project valuation and decision based on the average Return On Investment (ROI), obtained as the ratio of total operating profit (NOPAT) to total invested capital or, equivalently, as the ratio of net cash flow to total invested capital. The approach presented enables decomposing the economic value created into the project scale (total capital invested) and the economic efficiency, obtained as the difference between average ROI and a suitably adjusted weighted average cost of capital (WACC). We show that a project’s average ROI is equal to the weighted mean of the average Return On Equity (ROE) (total net income divided by total equity capital) and the average Return On Debt (ROD) (total interest expenses to total debt outstanding) and show that the average ROE itself correctly measures shareholder value creation when compared with a suitably adjusted cost of equity. We show that the internal average-based approach presented is also valid under the more general assumption of time-varying cost of capital.

Istraživanje odnosa između prosečne ponderisane cene kapitala i odabranih racija profitabilnosti preduzeća u Republici Srbiji

The weighted average cost of capital (WACC) is determined as the weighted average cost of capital of all long-term sources of corporate financing. WACC is used as a discount rate when determining the value of a company, then in investment analysis when making a decision to accept/reject a project, as well as when evaluating the performance of top management. The paper calculates the WACC for all non-financial corporations that make up the basket of the Belex15 index and then examines the relationship between the weighted average cost of capital and the profitability ratios numbers ROA, ROE and net profit margin. The research results show that the WACC ranges between 3.45% and 17.77% for the sample companies. Also, the results show a negative correlation between WACC on one and selected profitability ratios on the other hand. However, it should be noted that this relationship is statistically significant only between WACC and net profit margin.

СТРУКТУРА ТА ЕФЕКТИВНІСТЬ ІНВЕСТИЦІЙ У СПОРТИВНУ ІНДУСТРІЮ КРАЇН (НА ПРИКЛАДІ ЕКОНОМІКИ НІМЕЧЧИНИ)

In the last thirty years sport is turning into business and football clubs are developing into large corporations. Sports industry has been becoming not just more exciting but also highly lucrative. The value of professional football sector is estimated to be about 8 billion euros. Even more investors see sports leagues or football clubs as profitable investments. For instance, European Super League can be taken, which could have been more profitable for investors than other competitions and attracted such sponsor as JPMorgan Chase. However, in the near future such project has no support from governments and other clubs and therefore has no future yet. One type of investment in the sports industry is the purchase of shares in sports clubs. Borussia Dortmund is a German football club, one of the most successful clubs in the world, which plays in the Bundesliga, the top tier of the German league system. Dortmund’s shares are listed on the Frankfurt Stock Exchange. Borussia is the only club in Germany and among approximately 25 clubs in the world, including few British and Italian clubs, whose shares are publicly traded. Even more clubs are considering going public to increase its capital. One of the biggest clubs in Belgium, Brugge examined such opportunity, though the club postponed their initial public offering because of the low demand. On the contrary, Ukrainian football club Veres started selling its shares in April 2021 and during the first day have received bids for the purchase of stocks for the amount of over 36 million hryvnas. However, the benefit for the investor might be only the increase of a share price as the club does not intend to pay out dividends. The article analyses the price of a club share for more than 20 years and historical dividends. Borussia’s stock is analysed using futures contracts. It also examines such indicators as return on invested capital (ROIC), weighted average cost of capital (WACC), return on assets (ROA), which are compared with those of Manchester United, Juventus, Lazio and Ajax. A model is being built to predict the stock price during COVID-19 and before the start of the pandemic to compare price fluctuations and model errors.

Establishment and use of a holistic controlling system for listed German corporations: A contribution to the current discussion on the “right” profit

The recent discussions about the “right” profit in business administration have led to uncertainty in research and practice about which performance measures and business management concepts should be used to manage companies. The authors are of the opinion that this is only possible with the help of top financial ratios with regard to the shareholder value concept. Thereby, the methods of the weighted average cost of capital (WACC) approach and the capital asset pricing model (CAPM) should be used to determine the value of the company. In addition, non-financial goals should be included in the management processes with the help of the integrated balanced scorecard. Against this background, the authors develop a holistic controlling concept for listed companies, which can be used for strategic corporate management, taking into account the income tax effects relevant to decision-making.

Financial Feasibility Study of Hydro Power Plant on A River in West Sumatra

As a part of nation worldwide, Indonesia set the target for the renewable energy source. The renewable energy should be 23% of the energy mix generation that mentioned in the RUPTL 2019 -2028. PT. XYZ as the company which have the responsibility regarding the electricity in Indonesia should work hard to find and invest in renewable energy source. In West Sumatra, there is one river that can be potential to create the hydro power plant that expected to generate as much as 296.104.624 kWh. The construction of the hydro power plant itself will be started from the scratch that obviously will cost much money. The company should consider if it is wise to invest in constructing the hydro power plant or not. This research aims to analyze the financial feasibility study of the hydro power plant in West Sumatra, the financial performancef of the project, and find which variable that affect the project greatly. This research performs general environment analysis using PESTEL analysis to identify whether the environment support the project execution or not. The financial feasibility analysis performs using the discounted cashflow method and evaluated using Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period (PP). To identify which variable that affected the financial feasibility of the project, the author use sensitivity analysis and scenario analysis. Furthermore, Monte Carlo simulation also performed in this research to give an information regarding the probability impact of the uncertainty from the selected variable. The calculation result shown that the project is financially feasible with NPV of Rp. 1.832.776.500.481, IRR of 15,77% which is higher than the weighted average cost of capital (WACC), and the payback period for 9,15 years. The financial performance also shown a favourable result with the project’s profitability index of 5,41. Long-term debt interest rate, capacity factor, agreement price, CAPEX need, and inflation rate are the highest five variable that affect the feasibility of the project. According the Monte Carlo simulation result using 1000 iterations, the project has probability of 6,34% in making the project not feasible.

Economic Value-Added Creation by Optimizing Capital Structure in Project Finance

Infrastructure Projects are large investment by the public and/or private sector that required enormous financial resource commitment to build physical asset and facilities needed for economic development so that the company need project financing to support with. Project finance is based on debt repayment from project companies’ revenue and not on the sponsors or the developer’s balance sheet, so the project companies should assure the cash flow is sufficient for debt repayment and dividend payment. Beside that investors still have to analyze the value created in that project with highest positive Economic Value Added. Net Operating Profit After Tax (NOPAT) need to cover cost of invested capital to create value so that the ratio of NOPAT to total Project Cost (Return on Invested Capital) is should be more than the weighted average cost of capital (WACC). The capital structure doesn’t have an optimum weight and cost as long as the Return on Invested Capital (ROIC) higher than WACC.

Decision Making for Project Appraisal in Uncertain Environments: A Fuzzy-Possibilistic Approach of the Expanded NPV Method

The major drawback of the classic approaches for project appraisal is the lack of the possibility to handle change requests during the project’s life cycle. This fact incorporates the concept of uncertainty in the estimation of this investment’s worth. To resolve this issue, the authors use fuzzy numbers, possibilistic moments of fuzzy numbers and the hybrid (fuzzy statistic) fuzzy estimators’ method in order to introduce a fuzzy possibilistic version of the expanded net present value method (FPeNPV). This approach consists of two factors: the fuzzy possibilistic NPV and the fuzzy option premium. For the estimation of the fuzzy NPV, some basic assumptions are taken into consideration: (1) the opportunity cost of capital, used as the present value interest factor calculated through the weighted average cost of capital (WACC), (2) the equity cost, determined through the possibilistic set-up of the capital asset pricing model CAPM, and (3) the inflation factor, also included in the estimation of the NPV. The fuzzy estimators’ method is used for the computation of the fuzzy option premium. An algorithm of nine major steps leads to the computation of the FPeNPV. This gives the administration the opportunity to adapt to potential changes in the company’s internal and external environments. In this way, the symmetry between the planning and execution phase of a project can be reinstated. The results validate the statement that fuzzy and intelligent methods remain valuable tools to express uncertainty in various scientific areas. Finally, an illustrative example aims at a thorough comprehension of this new approach of the expanded NPV method.

Floating Offshore Wind Farms in Italy beyond 2030 and beyond 2060: Preliminary Results of a Techno-Economic Assessment

At the end of 2019, 10.5 GW of wind capacity was installed in Italy, all onshore. The National Integrated Climate and Energy Plan sets a target of 18.4 GW of onshore wind capacity and 0.9 GW of offshore wind capacity by 2030. Significant exploitation of offshore wind resources in Italy is expected after 2030, using floating wind turbines, suitable for water depths greater than 50 m. This technology is at the demonstration phase at present. Results of a preliminary techno-economic assessment of floating wind plants in Italian marine areas in a medium (2030) and long-term (2060) scenario are presented. In 2030, a reference park with 10 MW wind turbines will be defined, and parametric costs, depending on distance from shore, were assessed. In 2060, possible wind resource variations due to climate change, and cost reductions due to large diffusion of the technology were considered in three case studies. The economic model used was the simple Levelized Cost of Energy (sLCoE). Different values of Weighted Average Cost of Capital (WACC) were considered too. The results show LCoEs comparable to the ones expected for the sector in 2030. In 2060, even in the more pessimistic scenario, wind resource decreases will be abundantly compensated by expected cost reductions.

Can audit effort (hours) reduce a firm’s cost of capital? Evidence from South Korea

ABSTRACT In this paper, we examine the relationship between audit effort measured as audit hours and a firm’s weighted average cost of capital (WACC). Using a sample of Korean listed firms, we hypothesise a potentially bi-directional relationship between WACC and audit effort based on audit “supply”/audit “demand” theory. We find that after controlling for known determinants of firm risk, additional audit hours reduce a firm’s WACC. In our additional analysis, we continue to find that WACC reduces with audit hours based on risk partitioning for (i) Big4 clients/investment grade (IG) firms and (ii) NonBig4 clients/non-investment grade (NIG) firms. However, we find the reduction in WACC occurs at a lower rate for the less risky group compared to the riskier group. We interpret that market participants consider Big4 clients/IG firms to have lower risk, and thus, the marginal effect of greater audit hours in enhancing audit quality (reducing audit risk) is lower for Big4 clients/IG firms compared to NonBig4 clients/NIG firms. Taken together, our findings consistently demonstrate that audit hours (effort) reduce WACC based on audit hours signalling audit quality to market participants.

On the Theoretical Foundation of Corporate Finance

Modigliani and Miller theory forms the theoretical foundation of corporate finance. Yet Modigliani and Miller theory was derived from a very special case of cash flows. Weighted Average Cost of Capital (WACC), which is part of the Modigliani and Miller theory, plays a fundamental role in capital structure decision and asset valuation. In practice, asset valuation calculated from cash flows discounted by WACC almost always differs from the sum of debt and equity values. We derive asset valuations for more general cashflows. Only when the debt equity ratio is constant over time, valuation by WACC is equal to the sum of debt and equity values.

Determining the Optimal Concession Period in Cancer Hospital Project using Public-Private Partnership (PPP) with Availability Payment Scheme

The construction of Cancer Hospital in city of X which require total Capital Expenditure of Rp 1,135,834,554,688 can answer the need of comprehensive cancer services in Indonesia. But due to limited local government budgets, forcing local government to find alternative funding through Public Private Partnership (PPP) scheme. One of the newest PPP scheme at the moment is the Availability Payment (AP) scheme.
 Through this research, authors analyze the optimal concession period and the feasibility of this investment plan by calculating the required Capital Expenditures, Operating Cost, and other expense and Risk embedded to the project. The optimal concession period is analyzed by simulation of different concession period scheme ranging from 10-25 years and find the lowest required Availability Payment. The feasibility of the cancer hospital project is analyzed by using Discounted Cash Flow parameter which are Net Present Value, Internal Rate of Return and Payback Period. The risk embedded to the project is analyzed by using sensitivity, scenario and monte carlo analysis.
 From the result of Availability Payment calculation, the optimal concession period for this project is 22 years, this period scenario generates AP payment of Rp 287,712,786,883. The result of this project is financially feasible with positive Net Present Value of Rp 95,490,595,725, the Internal Rate of Return (IRR) of 12,66% which greater than Weighted Average Cost of Capital (WACC) of 11.92% , and Payback Period of 11,17 years. This Cancer hospital Project is financially safe to build by business entity (BUP). From 10,000 trials of Monte Carlo simulation, the project NPV will lies between Rp 59,335,915,203 to Rp 121,260,967,584 with 95% certainties with worst case scenario NPV still positive Rp 40,041,126,128. Based on the sensitivity analysis the COGS expense is the variable that most affecting the overall NPV of this project, followed by the long-term debt interest rate.