Chart from research paper displaying varying discount rate wedge in the US over time

Corporate Discount Rates Niels Joachim Gormsen and Kilian Huber – Working paper A new database of firms’ discount rates and costs of capital. The perceived cost of capital is related to the financial cost of capital, but the wedge between discount rates and the perceived cost of capital has grown substantially over the past decades. These dynamics have important implications for how interest rates and asset prices affect corporate investment.

research paper on cost of capital pdf

Firms’ Perceived Cost of Capital Niels Joachim Gormsen and Kilian Huber – Working Paper While firms’ perceived cost of capital in part reflects expected returns in financial markets, there are substantial deviations that challenge macro-finance models. Moreover, the cross-sectional variation in the perceived cost of capital runs counter to the predictions of the “Investment CAPM.”

research paper on cost of capital pdf

Climate Capitalists Niels Joachim Gormsen, Kilian Huber, and Sangmin Oh – Working Paper “Green investing” has real effects if green firms actually reduce their perceived cost of capital and discount rate in response to green investing. We find that the difference in the perceived cost of capital between the greenest and the brownest firms has fallen since 2016, concurrent with the rise of green investing. Discount rates followed a similar pattern. A survey sheds light on the mechanisms. In a simple model, the observed differences reduce firm-level emissions by 20 percent.

research paper on cost of capital pdf

Sticky Discount Rates Masao Fukui , Niels Joachim Gormsen and Kilian Huber – Working Paper Firms’ nominal discount rates are sticky with respect to expected inflation. As a result, real investment demand increases when inflation is high. This mechanism generates a distinct source of monetary non-neutrality and raises investment in response to government spending.

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  1. (PDF) An Introduction to the Cost of Capital

    A capital market is a place where invest ors and consumers of capital (generally. companies or the government), raise long-term funds (longer than a year). Selling bonds. and stocks are two ways ...

  2. PDF The Cost of Capital: The Swiss Army Knife of Finance

    The Mechanics. The cost of capital, in its most basic form, is a weighted average of the costs of raising funding for an investment or a business, with that funding taking the form of either debt or equity. The cost of equity will reflect the risk that equity investors see in the investment and the cost of debt will reflect the default risk ...

  3. PDF Investment and the Cost of Capital: New Evidence from the Corporate

    The first measure—denoted by QAVG—uses the sum of the market value of the firm's equity and the book value of its debt, divided by the replacement value of capital. The numerator in the second measure—denoted by QKMV —is equal to the market value of the firm calculated by MKMV using the Merton model discussed above.

  4. PDF Information and the Cost of Capital

    1. Introduction. Fundamental to a variety of corporate decisions is a firm's cost of capital. From. determining the hurdle rate for investment projects to influencing the composition of the firm's. capital structure, the cost of capital influences the operations of the firm and its subsequent. profitability.

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    Size (Total Assets). GDP. The purpose of the study is to explore the effects of capitalization cost (Total Debt Ratio and Weighted Average Cost of Capital to the firm's performance) by reviewing the value of firm i.e. Tobin-Q and profitability or Return on Assets and GDP. 2.

  6. PDF Company Cost of Capital and Leverage: A Simplified Textbook

    company cost of capital and necessarily need to be considered. The paper is structured as follows: In Sect. 2, we endogenously determine the company cost of capital in the prominent time-continuous model framework by Le-land (1994) to demonstrate the fundamental effects of default risk and bankruptcy costs.

  7. PDF Valuation Handbook

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  8. Cost of Capital, Optimal Capital Structure, and Value of Firm: An

    So, capital structure is a very important determi-nant of the value of a firm. Franco Modigliani and Merton Miller (hereafter called M -M) were the first to present a formal model on valuation of capital structure. In their seminal papers (1958,1963), they showed that under the assumptions of perfect capital markets, equivalent risk class, no ...

  9. Cost of Capital

    Cost of Capital for Fair Value Reporting of Intangible Assets 757 CHAPTER 31 Cost of Capital in Evaluating Mergers and Acquisitions 779 ... from 1963 to 1969. During this time, he directed a research center known as the Investment Analysis Center, which worked closely with the University of Chicago's Center for Research in Security Prices. He ...

  10. PDF 11 04 Cost of Capital

    Cost of capital is a key element for corporate financing and investment decisions. The growing relevance of sustainability suggests that managerial decisions that improve corporate environmental footprint and risks might be priced by investors, thus reducing the cost of capital for global companies. The objective of this paper is to survey the ...

  11. PDF Cost of Capital: Literatures Review about Calculation Methods and

    In the standard financial textbooks there is the weighted average cost of capital , method, which calculates cost of capital equal to a weighted average cost of debt capital and equity: WACC 1= −+r w rw. e d d d( )4) ( the method is popular, but scholars have different views. on three variables in- volved in the equation.

  12. Cost of Capital: An Introduction

    Cost of Capital. Cost of Capital Weight Estimation. The Wacc Component Cost Estimation. Comprehensive Example of Estimating the Wacc. Cost of Capital for a Project. Cost of Capital in An International Context. Summary and Conclusions. Discussion Questions. References. About the Authors

  13. Full article: A look at the actual cost of capital of US firms

    2. Cost of capital construction. Schlegel (Citation 2015) provides perspective on the cost of capital's dual nature.What is "return" to investors is a "cost" of capital to the firm. Figure 1 extends Schlegel's cost of capital perspective by including stock and bond markets. The inclusion of stock markets reveals the "cost" of equity differs by perspective and also facilitates ...

  14. PDF Financial reporting quality, cost of capital, and firm's

    4 Research Design 9 4.1 Sample selection 10 4.2 Regression Formulas 13 4.3 Dependent Variables 13 ... capital. This paper is divided in the cost of equity and the cost of debt. Lower information asymmetry leads to lower cost of equity, which results in lower costs for the firm. ...

  15. The Cost of Capital

    Thus, the determination of the respective cost of capital of a venture can provide a base for making decisions on whether to accept the project profitably. In this context, this paper provides some basic explanations to facilitate the learners of the cost of capital with appropriate exhibits for their easy understanding.

  16. Research Papers

    We find that the difference in the perceived cost of capital between the greenest and the brownest firms has fallen since 2016, concurrent with the rise of green investing. Discount rates followed a similar pattern. A survey sheds light on the mechanisms. In a simple model, the observed differences reduce firm-level emissions by 20 percent.

  17. PDF THE COST OF CAPITAL

    The cost of capital of each source of capital is known as. component, or specific, cost of capital. The overall cost is also called the. weighted average cost of capital (WACC). Relevant cost in the investment decisions is the future cost or the marginal cost. Marginal cost is the new or the incremental cost that the firm incurs if it were to ...