Title : Interest Rates, Risk Premium, and Cost of Capital in Bangladesh

Authors : Sharif Ahkam, Azizur Rahman

Abstract : The weighted average cost of capital (WACC) is the minimum required return a firm must earn on its capital projects in order to generate the minimum returns required by the suppliers of long-term capital.This generally serves as the discount rate the firm uses to evaluate capital budgeting projects. In the context of Bangladesh, we need to make some modifications to the standard procedure for determining the cost of capital. The prevailing interest rate in the country plays a significant role in determining WACC and currently, the rates are very high. The interest rates, in turn, are significantly influenced by the inflation expectation. We also need an estimate for market return and we do not have a good proxy for that at this point. Further, the way the companies are resorting to bonus shares as a mode for dividend payment is complicating market return estimates. In addition, the 10 per cent tax rebate for certain dividend paying firms requires a unique type of modification in the equation for required return on shareholder equity. This article suggests using a 30 per cent required return for equity investors under the prevailing market conditions.

Journal : The Cost and Management Volume : XXXIX Year : 2011 Issue : 6
Pages : 12-16 City : Edition : Editors :
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