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Measuring the cost of capital in cooperative businesses

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  • Jeffrey S. Royer

Abstract

Cooperatives usually cannot employ market‐based methods for valuating equity capital and must rely instead on accounting‐based methods. This paper assesses several approaches for valuating cooperative equity and suggests that the rate of return on equity is an appropriate measure of the opportunity cost of equity because it determines the levels of cash patronage refunds, equity retirement, and growth a cooperative can maintain. Simulations are used to explore the relationship between various measures and the rate of growth and demonstrate that the rate of return on equity is the only measure invariant with respect to changes in the growth rate. Calculations for US cooperatives show that the rate of return on equity results in a higher cost of equity than estimates based on the opportunity cost of funds and confirm that equity is more expensive than borrowed capital. A numerical example illustrates the early redemption of member equities at a discount.

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  • Jeffrey S. Royer, 2019. "Measuring the cost of capital in cooperative businesses," Agribusiness, John Wiley & Sons, Ltd., vol. 35(2), pages 249-264, April.
    • Handle: RePEc:wly:agribz:v:35:y:2019:i:2:p:249-264
    DOI: 10.1002/agr.21594
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    References listed on IDEAS

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    1. Pederson, Glenn, 1998. "Cost of Capital for Agricultural Cooperatives," Research Reports 280007, United States Department of Agriculture, Rural Development.
    2. Eversull, E. Eldon, 2011. "Cooperative Financial Profile, 2008," Research Reports 280110, United States Department of Agriculture, Rural Development.
    3. Royer, Jeffrey S., 1992. "Cooperative Principles and Equity Financing: A Critical Discussion," Journal of Agricultural Cooperation, National Council of Farmer Cooperatives, vol. 7, pages 1-20.
    4. Cobia, David W. & Royer, Jeffrey S. & Wissman, Roger A. & Smith, Dennis Paul & Davidson, Donald R. & Lurya, Stephen D. & Mather, J. Warren & Brown, Phillip F. & Krueger, Kenneth P., 1982. "Equity Redemption: Issues and Alternatives for Farmer Cooperatives," Research Reports 180969, United States Department of Agriculture, Rural Development.
    5. Rathbone, Robert C. & Wissman, Roger A., 1993. "Equity Redemption and Member Equity Allocation Practices of Agricultural Cooperatives," Research Reports 257202, United States Department of Agriculture, Rural Development.
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    Cited by:

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