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The Corporate Cost of Capital and the Return on Corporate InvestmentEugene F. FamaUniversity of Chicago - Booth School of Business (Finance Authors) Kenneth R. FrenchDartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER) April 1998 CRSP Working Paper Abstract: We estimate two internal rates of return for the non-financial corporate sector: (i) the return on the initial market values of the securities issued by firms, and (ii) the return on the cost of their investments. The return on cost is the return delivered by firms on investment outlays. The return on value is an estimate of the overall corporate cost of capital, that is, the return on investment required by the capital market. The estimate of the corporate cost of capital for 1950-96 is 10.72 percent. The return on cost is larger, 12.11 percent, so on average corporate investment seems to be profitable. A byproduct of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns themselves.
Number of Pages in PDF File: 31 JEL Classification: G30 working papers seriesDate posted: August 11, 1998Suggested CitationContact Information
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