Evaluation of capital cost: long run evidence from manufacturing sector
ENThe article is directed to determine the most appropriate method for evaluating cost of capital of a manufacturing sector and, using the methodology, to perform a case study of Lithuanian manufacturing sector. For the evaluation of capital cost, calculation of Weighted Average Capital Cost was chosen, as literature analysis distinguished this method as the most widely accepted and used. The most popular methods for cost of capital evaluation prevent investors from estimating capital cost in countries, which do not contain liquid, mature financial markets. This paper contributes to methodology of WACC assessment by adapting the method for less liquid markets with new techniques, like using country’s credit ranking to measure risk premium and adding it to base premium of mature equity markets. The paper also evaluates, how much changes in WACC affect long-term investments into fixed assets in Lithuanian manufacturing sector. The case study of Lithuanian manufacturing sector was performed for the period of 2001–2016. Empirical study revealed that required rate of return on separate WACC components evolved differently between the years of 2001–2016. Average annual return on equity for the period 2001–2016 was 7.7 %, while average annual return on debt was only 4.4 %. In the year 2015, the weight of equity capital, exceeded 50 % first time during the analysed period. In the same year, ratio of net profit before taxes to total assets of Lithuanian manufacturing sector also reached the highest value at the time, later surpassed in 2016. This fact demonstrates that increased free cash flows from the operations were reinvested into further development of the companies. To maximize value of the shareholders, it would be preferable to pay out a portion of earnings as dividends and finance growth with debt, as it is currently a cheaper alternative.
