An Analysis of the Approaches used by Industrial Companies Listed on the JSE to Identify their Cost of Capital

Abstract

In order to maximise shareholder’s wealth, financial managers need to estimate their firm’s cost of capital. This paper, which is based on the results of a questionnaire sent to industrial companies listed on the JSE, examines both the acceptance and application by South African financial managers of the cost of capital concepts and techniques hypothesised in financial management theory. The findings are also compared to the resuits of similar studies that have been conducted in the U.S.A. The results indicate that a significant proportion of the responding companies have not adopted approaches which are consistent with the concepts and theories as propagated by current financial management theory.

Keywords:

• cost of capital
• capital structure
• capital budgeting
• sources of finance
• financial decision-making

Additional information

Notes on contributors

A S Pocock

Tony Pocock is a partner in Mann Pocock & Associates

C de J Correia

Carlos Correia is a Senior Lecturer in the Department of Accounting at the University of Cape Town

M P Wormald

Michael Wormald is a Senior Lecturer in the Department of Accounting at the University of Cape Town