IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v17y2007i15p1227-1231.html
   My bibliography  Save this article

Computing the divisional cost of capital using the pure-play method

Author

Listed:
  • Henry Collier
  • Timothy Grai
  • Steve Haslitt
  • Carl McGowan

Abstract

The cost of capital model is used to calculate the net present value (NPV) of projects within a multi-unit corporation but may provide incorrect answers for projects that have a level of risk that differs from the overall average risk level for the corporation. We demonstrate the use of the pure-play method for calculating the required rate of return for a division of a corporation that has risk characteristics that differ from the risk characteristics of the overall corporation. We apply this methodology to the Integrated Electronic Systems Segment (IESS) of the Motorola Corporation. We find that the IESS division cost of capital of is 9.3% rather than the 12.3% cost of capital for the corporation as a whole.

Suggested Citation

  • Henry Collier & Timothy Grai & Steve Haslitt & Carl McGowan, 2007. "Computing the divisional cost of capital using the pure-play method," Applied Financial Economics, Taylor & Francis Journals, vol. 17(15), pages 1227-1231.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:15:p:1227-1231
    DOI: 10.1080/09603100600970065
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100600970065
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09603100600970065?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hamada, Robert S, 1969. "Portfolio Analysis, Market Equilibrium and Corporation Finance," Journal of Finance, American Finance Association, vol. 24(1), pages 13-31, March.
    2. Fuller, Russell J & Kerr, Halbert S, 1981. "Estimating the Divisional Cost of Capital: An Analysis of the Pure-Play Technique," Journal of Finance, American Finance Association, vol. 36(5), pages 997-1009, December.
    3. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    4. Gordon, Myron J & Halpern, Paul J, 1974. "Cost of Capital for a Division of a Firm," Journal of Finance, American Finance Association, vol. 29(4), pages 1153-1163, September.
    5. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Samir Harith & Ruth Helen Samujh, 2020. "Small Family Businesses: Innovation, Risk and Value," JRFM, MDPI, vol. 13(10), pages 1-15, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Min Bai & Samir Harith, 2023. "Measuring SMEs Risk – Evidence from Malaysia," SN Business & Economics, Springer, vol. 3(7), pages 1-32, July.
    2. Magni, Carlo Alberto, 2005. "Theoretical Flaws In The Use Of The Capm For Investment Decisions," MPRA Paper 6330, University Library of Munich, Germany, revised Nov 2007.
    3. Zabolotnyy, Serihiy & Wasilewski, Mirosław, 2018. "Operating and financial leverage as risk measures in agricultural companies," Problems of Agricultural Economics / Zagadnienia Ekonomiki Rolnej 276377, Institute of Agricultural and Food Economics - National Research Institute (IAFE-NRI).
    4. Albers, Christian & Lamprecht, Dirk, 2007. "Die Bewertung von Joint Ventures mit der Free Cash Flow-Methode unter besonderer Berücksichtigung kooperationsinterner Leistungsbeziehungen," Arbeitspapiere 65, University of Münster, Institute for Cooperatives.
    5. Magdalena Mikolajek-Gocejna, 2021. "Estimation, Instability, and Non-Stationarity of Beta Coefficients for Twenty-four Emerging Markets in 2005-2021," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 370-395.
    6. Paulo Alves, 2013. "The Fama French Model or the Capital Asset Pricing Model: International Evidence," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(2), pages 79-89.
    7. Vinod Kumar, 2023. "Is the Beta Anomaly Real? A Correction in Existing Theories of Cost of Capital and Asset Pricing," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 22(2), pages 135-163, June.
    8. Lund, Diderik, 2006. "Taxation and systematic risk under decreasing returns to scale," Working Papers 02-2003, Copenhagen Business School, Department of Economics.
    9. Paul Handro & Bogdan Dima, 2024. "Analyzing Financial Markets Efficiency: Insights from a Bibliometric and Content Review," Journal of Financial Studies, Institute of Financial Studies, vol. 16(9), pages 119-175, May.
    10. Gérard Charreaux, 2000. "L'approche économico-financière de l'investissement: une vision critique," Working Papers CREGO 1000501, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    11. Shahzad, Syed Jawad Hussain & Zakaria, Muhammad & Raza, Naveed, 2014. "Sensitivity Analysis of CAPM Estimates: Data Frequency and Time Frame," MPRA Paper 60110, University Library of Munich, Germany.
    12. A. D. Castagna & Z. P. Matolcsy, 1978. "The Relationship Between Accounting Variables and Systematic Risk and the Prediction of Systematic Risk," Australian Journal of Management, Australian School of Business, vol. 3(2), pages 113-126, October.
    13. Hoang, Daniel & Gatzer, Sebastian & Ruckes, Martin E., 2018. "The economics of capital allocation in firms: Evidence from internal capital markets," Working Paper Series in Economics 115, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    14. Maria PASCU-NEDELCU, 2011. "Merton Model For Assessing The Cost Of Capital, Mathematical Amount But Not Also Economic Amount Of Capm And Apt Models," Journal of Doctoral Research in Economics, The Bucharest University of Economic Studies, vol. 3(1), pages 47-61, March.
    15. Cynthia M. Gong & Di Luo & Huainan Zhao, 2021. "Liquidity risk and the beta premium," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(4), pages 789-814, December.
    16. Babak Jafarizadeh & Reidar B. Bratvold, 2019. "Exploration economics: taking opportunities and the risk of double-counting risk," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 32(3), pages 323-335, November.
    17. Levy, Moshe, 2022. "An inter-temporal CAPM based on First order Stochastic Dominance," European Journal of Operational Research, Elsevier, vol. 298(2), pages 734-739.
    18. Ditimi Amassoma & O. Adeleke, 2018. "Testing for the Causality between Interest Rate and Stock Market Performance in Nigeria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 109-124.
    19. Hasnie, Syed Sharjeel Ahmad & Collazzo, Pablo & Hassan, M. Kabir, 2022. "Risk assessment of equity-based conventional and islamic stock portfolios," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 363-378.
    20. Bernard Bollen & Philip Gharghori, 2016. "How is β related to asset returns?," Applied Economics, Taylor & Francis Journals, vol. 48(21), pages 1925-1935, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:17:y:2007:i:15:p:1227-1231. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.