A Study On Cost Of Capital Of The State-owned Enterprises

The cost of capital is an important concept of corporate finance. It plays an important role in the corporation’s investment and financing decisions, working capital management, analysis of capital structure, business valuation and performance evaluation. For enterprises, estimating the cost of capital is of great significance to enterprise assets management and value enhancement. Western scholars have already proposed several models for estimating the cost of capital, but there has not been a reasonable method to estimate the cost of capital for Chinese enterprises.The state-owned enterprise is an important component of China’s economy. Many important industries related to national economy and people’s livelihood are dominated by state-owned enterprises. To some extent, the state-owned enterprise plays a leading role in China’s economy. With the in-depth development of China’s state-owned enterprises reform, the state-owned enterprises are faced with more opportunities and challenges. However, some existing reasons such as ignoring capital cost, excessive expansion of scale, imperfect evaluation system prevent the operating efficiency of state-owned enterprises from raising, lower the efficiency of state-owned assets, restrict the operation of state-owned assets and go against the preservation and appreciation of state-owned assets. The author concludes that the root of these results is that most state-owned enterprises lack sufficient attention on the concept of capital cost, especially ignoring the compensation for the cost of equity capital. Beginning with the impact of enterprise capital cost on the management of state-owned enterprises, this thesis selected the China Railway Construction Corporation as an example and launched a study on how to utilize capital cost to conduct corporation investment and financing decision-making and performance evaluation.This thesis was based on the case study method. Beyond all, the domestic and international capital cost theory and empirical research experiences were reviewed in the thesis. Then the practical application of capital cost was discussed. After introducing and evaluating the methods of capital cost estimation, the author collected related information through various channels and selected the three years2008-2010, financial data of CRCC. Based on the operational areas and purposes of CRCC and meeting the assumptions of formulas, the thesis obtained related cost of capital rate by calculations. In the end, the thesis discussed the application of capital cost of CRCC and carried on analysis from financing structure, investment decisions and performance evaluation these three aspects. The following policy recommendations for CRCC were drawn:In terms of financing structure, CRCC should choose assets whose capital cost is lower such as medium-term notes. At the same time, financing lease and new financing tools should come into play. Group financing company should also be organized as soon as possible. In terms of the decision of project investment, the decision makers should lay emphasis on the following matters:regarding the cost of capital as a bottom line, keeping the cost of capital manageable, forming diversified investment channels, focusing on the management of capital expenditure, optimizing the investment structure, considering the long-term impact of investment projects and breaking the restrictions of current cost of capital. In terms of performance evaluation, the decision makers should lay emphasis on the following matters:setting5%(which was provisioned by SASAC) as a reference standard all along, strengthening the management and control of cost of capital, implementing the strategy of cost leadership, paying attention to the efficiency in the use of funds, improving asset turnover, enhancing the ability of independent innovation and core competitiveness.