The determinants of capital cost

15 March 2000

Consulting firm PricewaterhouseCoopers announced the key findings of a survey conducted by its financial advisory services arm on the factors driving the costs of equity and debt in India, the expected trends therein, the historical trends in capital structure and the possible ways in which cost of capital can be reduced.

The survey, designed and implemented by PwC in the last quarter of 1999, incorporates views and opinions of leading Indian corporates, lenders and equity analysts / investors.

The survey findings indicate that 'business risk', 'quality and shareholder value orientation of management', 'cash flows' and 'leverage' are the important factors that influence the cost of equity for a company. As drivers of cost of debt for Indian companies, the importance of 'Reserve Bank of India policies' and 'asset backing of the company' is declining since 1991 and this trend is expected to continue. On the other hand, the importance of 'cash flows', 'quality of management' and 'business risk' has been rising. Leveraging continues to significantly influence the cost of debt.

Commenting on the significance of this survey, Amal Ganguli, chairman, PricewaterhouseCoopers India, says, "Requirements, preferences and perceptions of fund providers vary and need to be understood by corporates to manage their cost of capital. Indian companies are increasingly appreciating the greater relevance of cost of capital in running their businesses. We have tried to study all the pertinent factors that have a direct or indirect bearing on such costs. We believe that this survey will be of tremendous relevance to Indian companies."