Cost of capital is beyond our reach

Lister, RJ

Abstract

It seems churlish to discredit cost of capital when practice and theory remain loud in its praise. Tim Ogier and colleagues' Real Cost of Capital has penetrated boardrooms while Seth Armitage's Cost of Capital graces business schools worldwide. Cost of capital is no doubt significant in principle as a neat criterion for checking out the value of our equity, bonds, corporate plans and acquisition targets. The trouble is that we can't define or measure it within useful bounds. In particular:
• The favoured definition - weighted average cost of capital (WACO - is impoverished. Even an extended definition may not reflect what actually matters to investors.
• We can't measure the parameters of any definition with useful accuracy.
• Attempts to adapt a general cost of capital to the individual company and then to individual projects merely compound basic unrealities.
• If we seek wisdom in practice we find managers behaving in an untutored, inconsistent and incomplete way

Citation

Lister, R. (2006). Cost of capital is beyond our reach. Accountancy (London), 138(1360), 42-43

• Journal Article Type: Article
• Publication Date: Dec 1, 2006
• Deposit Date: Oct 16, 2007
• Journal: Accountancy
• Print ISSN: 0001-4664
• Peer Reviewed: Peer Reviewed
• Volume: 138
• Issue: 1360
• Pages: 42-43