THE MEASUREMENT OF A FIRM'S COST OF CAPITAL

The relevance of a firm's cost of capital in its investment decisions is widely recognised. The concept and associated issues have been and are likely to be increasingly important in the regulatory activities of government and semi-government bodies, e.g. prices regulation, profit regulation for semi-government enterprises, antitrust and takeover regulation. This paper outlines the principles involved in estimating a firm's before-tax and after-tax cost of capital. The paper also suggests practical approaches that may be taken when difficulties arise in estimating parameters to the problem.