Practitioners' perspectives on the UK cost of capital

Edward McLaney, John Pointon, Melanie Thomas, Jon Tucker

Research output: Contribution to journalReview articlepeer-review

30 Citations (Scopus)
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The aims of this study were to determine how UK finance practitioners derive and review the cost of capital, and to ascertain whether the final figure varied with the choice of method. To investigate behaviour in the real world a survey questionnaire was employed, eliciting responses from the finance directors of 193 UK quoted firms. The results suggest that the cost of capital calculation is subject to wide variation across firms, both with regard to the overall figure and the precise computation of its components. The intuitive appeal of the WACC and CAPM approaches appears to ensure their continued popularity in the real world. However, firms tend not to make all of the adjustments to the overall figure which academics might expect, only making simple adjustments for risk and the tax advantage to debt. The after-tax money cost of capital which is approximately 10%, is Influenced by the choice of method, and firms do not appear to revise their overall cost figure rapidly in response to the environment. The cost of capital decision is of such strategic importance for the longer-term maintenance and expansion of firm value that it is nearly always made within the domain of the board of directors.

Original languageEnglish
Pages (from-to)123-138
Number of pages16
JournalEuropean Journal of Finance
Issue number2
Publication statusPublished - 1 Jan 2004
Externally publishedYes

Bibliographical note

This is an Accepted Manuscript of an article published by Taylor & Francis in
European Journal of Finance on 01/04/2004, available

Copyright © and Moral Rights are retained by the author(s) and/ or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This item cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder(s). The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders.


  • CAPM
  • Cost of capital
  • Dividends
  • Earnings
  • WACC

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)


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