An Analysis of the Approaches used by Industrial Companies Listed on the JSE to Identify their Cost of Capital

Pocock, A S; Correia, C.; Wormald, M. P.

doi:10.1080/10108270.1991.11435023

Cited by 3 publications

(8 citation statements)

References 3 publications

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“…This survey found that 71.4% of companies determine the cost of equity. Although this is surprising, Pocock et al, (1991) found that 35% of companies in that survey employed the cost of the specific source of financing to evaluate certain projects. However, there may be valid reasons for this policy.…”

Section: Cost Of Capitalmentioning

confidence: 99%

“…The surveys indicate that the use of the payback method remains high, and Gilbert (2003) found that the use of DCF methods is related to firm size. Pocock, Correia and Wormald (1991) surveyed firms on the cost of capital practices and found that only 30% of companies employed a weighted average cost of capital. Parry and Firer (1990) found that 35% of companies in their survey used a cost of capital.…”

Section: Review Of the Related Literaturementioning

confidence: 99%

“…Although Parry and Firer's (1990) study is now dated, the use of decision tree analysis has remained constant over time, whilst the use of Monte Carlo simulation (despite the wide availability of Monte Carlo simulation programs and the exponential increase in computing power) has seen an increase in use from 7 to only 14%. However, Pocock, et al (1991) found that 58% of firms used sensitivity analysis, and the same study found that 15% of firms used simulation. This is closer to the results of this survey.…”

mentioning

confidence: 96%

“…Gitman and Mecurio (1982) found that only 30% of respondents in the USA used the CAPM. In South Africa, Pocock et al (1991) found that 35% of companies used some form of CAPM to determine the cost of equity. As in the USA, the results of this survey, indicate a significant growth in the use of CAPM by South African companies over the last 15 years.…”

mentioning

confidence: 99%

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An analysis of cost of capital, capital structure and capital budgeting practices: a survey of South African listed companies

Correia

Cramer

2008

Meditari Accountancy Research

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This study employs a sample survey to determine and analyse the corporate finance practices of South African listed companies in relation to cost of capital, capital structure and capital budgeting decisions.The results of the survey are mostly in line with financial theory and are generally consistent with a number of other studies. This study finds that companies always or almost always employ DCF methods such as NPV and IRR to evaluate projects. Companies almost always use CAPM to determine the cost of equity and most companies employ either a strict or flexible target debt‐equity ratio. Furthermore, most practices of the South African corporate sector are in line with practices employed by US companies. This reflects the relatively highly developed state of the South African economy which belies its status as an emerging market. However, the survey has also brought to the fore a number of puzzling results which may indicate some gaps in the application of finance theory. There is limited use of relatively new developments such as real options, APV, EVA and Monte Carlo simulation. Furthermore, the low target debt‐equity ratios reflected the exceptionally low use of debt by South African companies.

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Section: Cost Of Capitalmentioning

confidence: 99%

Section: Review Of the Related Literaturementioning

confidence: 99%

mentioning

confidence: 96%

mentioning

confidence: 99%

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An analysis of cost of capital, capital structure and capital budgeting practices: a survey of South African listed companies

Correia

Cramer

2008

Meditari Accountancy Research

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“…Firms in South Africa do not use methods such as Probabilities, Decision trees and Monte Carlo Simulation to any great extent and there has been little growth in the use of such methods in practice. Firms have traditionally made greatest use of Sensitivity Analysis and surveys (see Parry & Firer (1990); Pocock, Correia & Wormald (1991); Coltman, (1995)) found this to be the most important single method for determining project risk. Although, Sensitivity Analysis evaluates each variable in isolation, it is considered that firms undertake scenario type analysis using the same technique and there has been a significant growth in the use of Scenario Analysis over time.…”

Section: Project Risk Analysismentioning

confidence: 99%

Capital budgeting practices in South Africa: A review

Correia

2012

SAJBM

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This paper reviews the capital budgeting survey literature in South Africa over the period 1972 to 2008. The survey evidence indicates a significant growth in Discounted Cash Flow (DCF) methods and a fall in the use of other methods. In particular, there has been growth in the use of Net Present Value (NPV). Yet, the Internal Rate of Return (IRR) technique remains the primary method used in practice despite some serious drawbacks. Larger companies are more likely to use DCF methods. There has been a significant growth in the use of sensitivity analysis and scenario analysis. However, there is little use of sophisticated risk analysis tools such as Monte Carlo simulation, and decision trees. Although financial theory predicates the use of risk adjusted discount rates, surveys indicate that the majority of companies use a single firm discount rate. Companies have increasingly used inflation-adjusted cash flows but the process of ranking mutually exclusive projects is not aligned with finance theory. There is limited use of the Modified Internal Rate of Return (MIRR) method and DCF dominant companies do not outperform non-DCF dominant companies. The most important phase of project evaluation is the project definition and cash flow estimation phase and yet research studies have focused mainly on the financial analysis and project selection phase.

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An analysis of capital budgeting methods, the cost of capital and decision-makers in listed South African firms

Hall¹

2012

COC

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This study’s purpose was to link the length of decision-makers’ employment in a firm and their academic qualifications to their choice of capital budgeting methods and of cost of capital techniques. The results show that the net present value (NPV) is more popular than the internal rate of return (IRR) as a capital budgeting technique. Also, irrespective of how long respondents have been employed by a company, they all use a discount rate. However, there is a significant tendency among respondents with postgraduate qualifications to prefer the NPV as a capital budgeting technique. Thus, in South Africa, academic qualifications do play a role in decision-makers’ capital budgeting practices.

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An Analysis of the Approaches used by Industrial Companies Listed on the JSE to Identify their Cost of Capital

Cited by 3 publications

References 3 publications

An analysis of cost of capital, capital structure and capital budgeting practices: a survey of South African listed companies

An analysis of cost of capital, capital structure and capital budgeting practices: a survey of South African listed companies

Capital budgeting practices in South Africa: A review

An analysis of capital budgeting methods, the cost of capital and decision-makers in listed South African firms

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