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The Cost of Capital, Capital Budgeting, and the Maximization of Shareholder Wealth

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  • Beranek, William

Abstract

The need for a corporate marginal cost of capital to be used for internal accept-reject decisions (either as a rate of discount for net-present-value (NPV) computations or as a “cut-off” rate with the internal rate of return (IRR) criterion) has led numerous textbook writers to advocate some variant of a weighted average cost of capital. These authors agree substantially on how costs of individual sources of capital are to be assessed but are uncertain of how the weights should be determined, whether they should reflect the firm's existing capital structure, a target structure, or the mix, however determined, in the firm's forthcoming capital budget, and whether they should be based on book or market values. Moreover, it is not obvious how book or even market values should be measured. These writers have not proven that their intuitively held definitions do in general, for capital budgeting, imply maximizing shareholder wealth.

Suggested Citation

  • Beranek, William, 1975. "The Cost of Capital, Capital Budgeting, and the Maximization of Shareholder Wealth," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(1), pages 1-20, March.
    • Handle: RePEc:cup:jfinqa:v:10:y:1975:i:01:p:1-20_01
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    Cited by:

    1. Keef, Stephen P & Khaled, Mohammed S & Roush, Melvin L, 2011. "Miller's (2009) WACC model: An extension," Working Paper Series 1995, Victoria University of Wellington, School of Economics and Finance.
    2. Bradford, Garnett L. & Miller, Stephen E., 1998. "An Analysis Of Alternative Net Present Value Capital Investment Decision Models," Working Papers 18804, Clemson University, Department of Agricultural and Applied Economics.
    3. Juha Laitila & Robert Prinz & Lauri Sikanen, 2019. "Selection of a chipper technology for small-scale operations - a Finnish case," Journal of Forest Science, Czech Academy of Agricultural Sciences, vol. 65(4), pages 121-133.
    4. Keef, Stephen P & Khaled, Mohammed S & Roush, Melvin L, 2011. "Miller's (2009) WACC model: An extension," Working Paper Series 18608, Victoria University of Wellington, School of Economics and Finance.

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