Cost-of-Capital Estimation and Capital-Budgeting Practice in Australia

Giang Truong, Graham Partington and Maurice Peat
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Giang Truong: Lonergan Edwards & Associates Limited, Level 27, 363 George Street, Sydney, NSW 2000.
Graham Partington: Finance Discipline, School of Business, University of Sydney, NSW 2006
Maurice Peat: Finance Discipline, School of Business, University of Sydney, NSW 2006

Australian Journal of Management, 2008, vol. 33, issue 1, 95-121

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 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:33:y:2008:i:1:p:95-121

DOI: 10.1177/031289620803300106

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