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The cost of capital- the practitioners view

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  • Alan Clements

Abstract

To many practitioners, serious doubts exist about various aspects of the application of CAPM to the investment decision. This is especially so with respect to the cost of equity, where varying possible specifications of beta due to different observation periods leave many unconvinced. Is the beta a satisfactory measure of risk? And is it correct that only market risk matters? The practitioner is sceptical on these points and equally so of the plethora of advice received on the magnitude of the equity premium. With respect to financing, the thoughtful practitioner finds it disappointing that estimates of the cost of capital are little used in developing the company's funding strategy - including dividend policy. The pecking order hypothesis leaves us with no optimal capital structure. It merely tells us the way firms typically behave. Thinking practitioners continue to await the fully comprehensive theory of corporate finance that is wholly applicable in solving their problems. Maybe practitioners have to work harder at understanding, selling and applying the more intricate teachings of modern corporate finance but their patience is often tried by unworldly and conflicting prescriptions.

Suggested Citation

  • Alan Clements, 1999. "The cost of capital- the practitioners view," The European Journal of Finance, Taylor & Francis Journals, vol. 5(3), pages 247-255.
    • Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:247-255
    DOI: 10.1080/135184799337082
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    Cited by:

    1. Hans Eijgenhuijsen & Adrian Buckley, 1999. "An overview of returns in Europe," The European Journal of Finance, Taylor & Francis Journals, vol. 5(3), pages 276-297.

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