Analysis Of Average Cost Of Capital About Our Listed Central State-owned Enterprises

Our central enterprises have played an important role in national economicdevelopment, they not only created many employment opportunities, turned in a lot oftaxes, but also most of them are distribute in the pillar industry of our country, controlthe lifeblood of our economy. Want to be in an invincible position in the fiercecompetition of the market economy environment, the central enterprises mustcontinuously improve product quality, control production cost, and strengthenfinancial management. The cost of capital is the core concept of corporate finance, itprofoundly affects the financial strategy of enterprise’s investment decision, financingdecision, dividend distribution decision etc. But it is not widely used in our country,and there are some misunderstandings, many people confused the concept of cost ofcapital and financing cost, so we need to study carefully.The cost of capital is the necessary return demanded by investors, thedetermining factor is capital utilization but not capital sources, mainly determined bythe size of the risk of investment object. The cost of capital is divided into the cost ofequity capital and the cost of debt capital. Many people think the cost of equity capitalis zero if the company doesn’t pay dividends; in fact, due to bear greater risks than thedebt capital, equity capital cost is higher.The cost of capital is the required return on a project, it is a kind of expectation,so it difficult to measure. Traditional methods about calculating the cost of capitalincluding the Risk Premium Model, the Capital Asset Pricing Model (CAPM),Arbitrage Pricing Model, Multi Factor Model, etc. In this paper we choose the widelyused Capital Asset Pricing Model as tool to estimate the cost of capital.Through the analysis of the comprehensive data of109listed central enterprises’2003-2012financial report, stock data, combined with the stock market rate of return,we estimated the average cost of capital of the listed central enterprises. Afterestimation, China’s listed companies of central enterprise’s average cost of capitalis8.19%between2003-2012years, the average cost of equity capital is9.50%, the average cost of debt capital before tax is5.92%(average rate about one-year loan). Inorder to analysis of cost of capital level of China’s central enterprises, we compare itwith the return rate on investment, the financial cost, and other types of enterprises’cost of capital, companies of other country’s cost of capital. We found that our centralenterprises’ cost of capital higher than the financial cost, but lower than investors’return rate, this difference mainly due to capital gains.The factors that have a close relation with the central enterprises’ cost of capitalincluding: capital structure, enterprise risk management level, the level of informationdisclosure, the government linked level and so on. Because of state-owned enterprisesand state-owned commercial banks have the same controlling shareholder in essence,there must be some “related party transactions”; also the central enterprises have theinvisible “government guarantee”, so they can obtain relatively low cost of debtcapital. We also found that in our country, investors don’t sensitive about the gearingratio of the central sate-own enterprises.Implementing the modern enterprise management system, government should domore as an investor to supervise and guide, not to participate in the enterprise dailymanagement. The government shareholder’s requirement can be defined as the cost ofequity capital, which constraints strictly on the investment of central enterprises,improve its governance structure and management level.Analysis of the cost of capital is aim to improve the level of enterprise financialmanagement, including investment and finance decision, helping the governmentmake better policies, helping enterprises to create more wealth. There are manyapproaches to reduce the cost of capital, including perfect the structure of corporatemanagement, improve the performance appraisal system, strengthen the protection ofinvestors, actively participate in international competition etc.