Evaluation of Capital Cost: Long Run Evidence from Manufacturing Sector

Abstract

The article is directed to determine the most appropriate method for evaluating cost of capital of a manufacturing sector and, using the methodology, to perform a case study of Lithuanian manufacturing sector. For evaluation of cost of capital, calculation of Weighted Average Capital Cost was chosen, as literature analysis distinguished this method as the most widely accepted and used. Some changes were made to the methodology of WACC evaluation in order to adapt the method for countries, which do not contain liquid, mature financial markets, like using country’s credit ranking to assess risk premium and adding this premium to base premium for maturelly developed equity markets. The case study of Lithuanian manufacturing sector was performed for the period of 2001-2016. Empirical study revealed that required rate of return on separate WACC components evolved differently between the years of 2001-2016. Average annual return on equity for the period 2001-2016 was 7.7%, while average annual return on debt was only 4.4%. In the year of 2015 weight of equity capital, first time during the analyzed period, exceeded 50%. In the same year, ratio of net profit before taxes to total assets of Lithuanian manufacturing sector also reached the highest value at the time, later surpassed in 2016. This fact demonstrates, that increased free cash flows from the operations were reinvested into further development of the companies. To maximize value of the shareholders, it would be preferable to pay out portion of earnings as dividends and finance growth with debt, as it is currently a cheaper alternative.

The Moderating Effect of Transformational Leadership on the Relationship Between Entrepreneurial Orientation and Performance of Manufacturing Firms in Nairobi County

“…In recent years, the contribution of manufacturing to the economy has decreased more than any other sector (Nyoro, 2019;Heshmati & Rashidghalam, 2018). As a result of globalisation (Marques & Puig, 2010), regional integration (Kimbugwe et al, 2012), inadequate capital expenditures (Markauskas & Saboniene, 2020), insufficient innovation (Molina-Morales et al, 2011), and nonmarket issues (Van Ark et al, 2008), manufacturing firms face increased competition. Without a robust manufacturing sector, Kenya may not reach its Vision 2030 goal of becoming a globally competitive and successful upper-middle-income country with a high quality of life by 2030, despite the continued unfavourable trends (Farole & Mukim, 2013;Cheruiyot, 2017;Rambo, 2013).…”

Discount Rate of China’s New Energy Power Industry

“…The CAPM model does not consider the cost of debt incurred by project financing. The WACC is an appropriate tool for assessing investment risk and efficiently capturing the real discount rate of investments that have been identified in the literature [2,[13][14][15][16].…”

“…As firms with a high cost of debt invest less, most research focuses on the impact of the cost of equity [18]. Some authors proposed that the return on equity capital investment calculated by CAPM can be as the cost of equity of the WACC model [13][14][15]19]. For example, Inmaculada et al [13] discussed discount rates of the solar photovoltaic plants of Spain with CAPM as the component of WACC.…”

“…Angelopoulos et al [14] studied the most important risk categories of onshore wind energy investments in 28 countries of the European Union and applied the CAPM and WACC methods. Markauskas et al [15] compared the discount rates for different subdivision industries of the Lithuanian manufacturing sector with CAPM and WACC. Vergara et al [20] used CAPM and WACC methods to evaluate the discount rate for highway concessionaires in Chile.…”