Estimation of cost of own capital: methods and their application in the companies of agricultural sector
2006
Alekneviciene, V.(Lithuanian Univ. of Agriculture, Akademija, Kauno reg. (Lithuania). Dept. of Accounting and Finance) | Jatkunaite, D.(Lithuanian Univ. of Agriculture, Akademija, Kauno reg. (Lithuania). Dept. of Accounting and Finance)
The methods of cost estimation of own capital used in the developed economy countries have some limitations, and their application in the companies of agricultural sector are quite problematic till now. The authors of the paper propose to estimate cost of own capital (retained earnings, personal savings, and new issue) using the method of net profitability modified by the consideration of three indicators: average earnings per share or return on equity in the companies of the same industry; an average capital structure and the capital structure of the company; current risk of the company and the risk of a new investment project. Some problems arise due to the depreciation as a source of finance of long-term investment. The authors of the paper try to answer three questions: is the depreciation a source of finance? If yes, is it expedient to include its cost in WACC? If yes, how the cost of depreciation should be estimated? Latterly grants have become an important source of finance of long-term investments in the agricultural companies and farms, and substitute the own capital in the capital structure of the investment project. Therefore the authors present one of the possible methods for the estimation of the cost of grants.
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