Understanding How To Handle Budgets
In a preceding post I discussed why the expense of debt has small influence on investments. What about the expense of equity? Firms typically use (much) more equity than debt to finance their investments. So the expense of equity should matter far more. In a current study , Murray Frank and Tao Shen investigate how the cost of equity and the weighted average expense of capital (WACC) influence investments of US firms. Remarkably, they uncover that the expense of equity and the WACC are positively connected to corporate investments. Firms with a larger estimated expense of equity and WACC tend to invest significantly more. That is a quite strange outcome. We would anticipate firms with a high cost of capital to invest significantly less, not a lot more.
The subsequent query, even though, is where the pressure will be applied next. Münchau contends that Portugal is also bankrupt and should …
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