Cost of Capital Estimation and Capital Budgeting Practice in Australia

40 Pages Posted: 9 Oct 2007

See all articles by Giang Truong

Giang Truong

affiliation not provided to SSRN

Maurice Peat

The University of Sydney; Financial Research Network (FIRN)

Graham Partington

University of Sydney - School of Business - Finance Discipline; Financial Research Network (FIRN)

Abstract

We use a sample survey to analyse the capital budgeting practices of Australian listed companies. We find that NPV, IRR and Payback are the most popular evaluation techniques. Real options techniques have gained a toehold in capital budgeting but are not yet part of the mainstream. Discounting is typically by the weighted average cost of capital, assumed constant for the life of the project, and with the same discount rate across divisions. The WACC is usually based on target weights for debt and equity. The CAPM is widely used while other asset pricing models are not. The discount rate is reviewed regularly and is updated as conditions change. In most companies, project analysis takes no account of the value of imputation tax credits. Australian corporate practice is generally consistent with the practice of Australian price regulators, except that regulators take into account the value of imputation tax credits when computing the cost of capital.

Keywords: Cost of capital, capital budgeting, discount rate, CAPM, survey

JEL Classification: G12, G30, G31

Suggested Citation

Truong, Giang and Peat, Maurice and Partington, Graham, Cost of Capital Estimation and Capital Budgeting Practice in Australia. Available at SSRN: https://ssrn.com/abstract=1019962 or http://dx.doi.org/10.2139/ssrn.1019962

Giang Truong (Contact Author)

affiliation not provided to SSRN

Maurice Peat

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Graham Partington

University of Sydney - School of Business - Finance Discipline ( email )

Building H69
Sydney NSW, 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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