RDP 9205: Measuring the Cost of Capital in Australia 3. Results of Other Australian Studies

There have been a number of recent Australian studies of the cost of funds and the cost of capital. Not surprisingly given the above discussion, they have resulted in a wide range of estimates. In some cases the variety of approaches may have obscured rather than enlightened debate on the issue.

Some of the main studies are described in Appendix 1 and a summary of some estimates is shown in the following graph. The assumptions underlying them differ and the estimates were produced with different data and with different purposes in mind. For a thorough examination of the assumptions and exact details of each of the estimates, the original works should be consulted.

Two of the measures are taken from Brunker (1984). Measure (a) is his estimate of the real cost of funds scaled up to be expressed in pre-tax terms. Measure (b) is his estimate of the cost of capital , which is higher than the other estimates as it includes depreciation.^[19] Dews' measure has also been scaled up to place it on a pre-tax basis.^[20] The Department of Finance series is for required return on total assets.^[21] The Bureau of Industry Economics series is interpolated from a graph on the cost of capital for equipment with a 20 year life.^[22]

The following graph shows two versions of the cost of capital calculated using different combinations of the assumptions discussed above (but the same data sources).^[23] It shows a similar degree of dispersion of the measures to the above graph, again emphasising how the choice of assumptions can generate differing conclusions.

Footnotes

The two series are on pages 16 and 22 respectively of Brunker (1984). [19]

The data is given in Appendix III of Dews (1988). [20]

Column (9) on page 58 of the Department of Finance (1987). [21]

Figure 4 in Bureau of Industry Economics (1991). [22]

The higher line uses the E/P approach for equity returns, the overdraft rate for debt returns, and weights them using Dews' (1988) data. By contrast, the lower line uses the realised gains approach for equity returns, the bond rate for debt returns, and weights them using the marginal private non-finance sector liabilities data. [23]