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Survey: AFP Releases Key Benchmarks for Companies Calculating Cost of Capital

A new report,  'Current Trends in Estimating and Applying the Cost of Capital', released today by the Association for Financial Professionals (AFP), allows companies to compare techniques against those of other organizations.

In July 2013, AFP sent a 35-question survey to senior-level corporate practitioner members and prospects with job titles including CFO, Treasurer, and Director of Finance, generating 424 responses from both public and private organizations spanning a wide range of industries, with the largest concentration in the manufacturing industry.

The report, which is part of AFP's ongoing benchmarking and standard-setting in the field of corporate financial planning and analysis, found that in the 2013:

  • small fluctuations in cost of capital can create huge swings in discounted cash flow figures strongly affecting strategic decisions about future capital investments and acquisitions.
  • a majority of organizations continue to use the Capital Asset Pricing Model (CAPM) for estimating their cost of equity, with considerable variance in how they apply the model.
  • for estimating a risk-free rate, most organizations adopt a long-term view and use instruments with maturities of five years and longer. Since AFP's original 2010 study and following the S&P downgrade of U.S. sovereign debt during the summer of 2011, however, more companies are using short-term instruments.
  • compared to 2010, more organisations are imposing a cap or floor on the risk-free rate used to evaluate projects and investment, reflecting a riskier environment today.
  • only two of five organisations that use current or target market values to calculate weight for WACC analysis use current or forward looking measures. The rest use historical weights or book values.
  • only 22 percent of FP&A professionals believe that their cost-of-capital estimates accurately reflect the actual cost of capital, or that the estimate is within 25 basis points of the actual cost of capital.

The report, ‘Current Trends in Estimating and Applying the Cost of Capital’ is available at www.afponline.org/capital

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