1) The document discusses the results of a survey of 356 Australian companies on their capital budgeting practices. 2) It finds that net present value (NPV) and payback period are the most frequently used techniques, with NPV considered the most important. 3) The capital asset pricing model (CAPM) is the most popular method for estimating the cost of capital, using the risk-free rate of Australian treasury bonds.

1. AUSTRALIA
FINANCIAL THEORY AND PRACTICES
[FALL 2015]
December 2, 2015
COST OF CAPITAL ESTIMATION AND CAPITAL
BUDGETING PRACTICE

2. MRS. SHAKILA YASMIN
ASSISTANT PROFESSOR
INSTITUTE OF BUSINESS ADMINISTRATION
UNIVERSITY OF DHAKA
AMINUL ISLAM (ZR-07)
M.M. SUVRO SHAHRIAR (ZR-33)
NAVID AHMED MAMUN (ZR- 48)

3. 3FINANCIAL THEORY AND PRACTICES |
Country Profile: Australia [1 of 1]
USD 3.4 billion
AVERAGE DAILY
TURNOVER AT ASX
1.7%
INFLATION RATE
USD 1.4 trillion
GDP
2.4%
ECONOMIC
GROWTH RATE
USD 1.2 trillion
MARKET CAP
2.1k+
ENLISTED
TRADING CORPS

4. 4FINANCIAL THEORY AND PRACTICES |
6%
10%
10%
22%
8%
5%
2%
31%
3% 2%
Energy
Consumers Discretionary
Health Care
Industrials
Consumers Staples
Information Technology
Telecommunication Services
Materials
Utilities
Other
Survey Outline [1 of 1]
356
companies
87
269
Not responded
Responded
24.4%
Response rate
20
Questions
A$ 1.16 B
Average revenue
OBJECTIVE
PREFERENCES ON THEORETICAL CAPITAL BUDGETING
METHODS IN CORPORATE PRACTICES

5. 5FINANCIAL THEORY AND PRACTICES |
Techniques of Evaluation [1 of 1]
94%
91%
NPV Payback period
Frequency of Use
57%
30% 27%
Importance of Techniques
NPV
IRR
Payback
More Than
3
73%
3 or less
27%
Used techniques

6. 6FINANCIAL THEORY AND PRACTICES |
Estimation of the Cost of Capital [1 of 1]
72%
47%
CAPM Cost of Equity
plus premium
Popular Methods
16%
84%
Whether Companies Use WACC
Yes
No
T-bond
87%
T-bill
13%
Risk Free Rate Used to
Determine CAPM
60%
33% 7%
Estimation of Beta
Public
source
Self
other

7. 7FINANCIAL THEORY AND PRACTICES |
Project Discount Rate and Terminal Values
57%
Used company’s Discount
Rate
5-10 Years
Forecasting period length
43%
Never
Adjusted the discount rate
59%
42%
Use PV to determine
TERMINAL VALUE
Varies
Project to project
38% says Terminal Growth Rate

8. 8FINANCIAL THEORY AND PRACTICES |
Adjustments for Dividend Imputation Credits
Ignored
The impact
83%
Difficulties
37% could not adjust due to

9. 9FINANCIAL THEORY AND PRACTICES |
Conclusions & Limitations [1 of 1]
NPV
Most Popular Method
3-10 Years
Cash flow projection period
CAPM
Most Frequent Method for estimating
the cost of capital
1. Low response rate
2. Success dependent on knowledge of respondent
3. Survey may not reflect entire demographic
LIMITATIONS

10. 10FINANCIAL THEORY AND PRACTICES |
Conclusion [1 of 1]
Q&A