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The Cost of Capital, Capital Budgeting, and the Maximization of Shareholder Wealth

Published online by Cambridge University Press:  19 October 2009

William Beranek
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Extract

The need for a corporate marginal cost of capital to be used for internal accept-reject decisions (either as a rate of discount for net-present-value (NPV) computations or as a “cut-off” rate with the internal rate of return (IRR) criterion) has led numerous textbook writers to advocate some variant of a weighted average cost of capital. These authors agree substantially on how costs of individual sources of capital are to be assessed but are uncertain of how the weights should be determined, whether they should reflect the firm's existing capital structure, a target structure, or the mix, however determined, in the firm's forthcoming capital budget, and whether they should be based on book or market values. Moreover, it is not obvious how book or even market values should be measured. These writers have not proven that their intuitively held definitions do in general, for capital budgeting, imply maximizing shareholder wealth.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 10 , Issue 1 , March 1975 , pp. 1 - 20
Copyright
Copyright © School of Business Administration, University of Washington 1975

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References

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