How Brazilian managers take their decisions on cost of capital?

Abstract

Although there are theories of capital structure and cost of capital since the 1950s, researches show that there is no unanimity about practical application by managers in several countries. This study, therefore, has the objective of presenting how Brazilian managers define the cost of capital of their companies. Unlike other studies, this work presents clarification not only about the methods and variables that make up the cost of capital, but it also deals with criteria related to time and sources of data collection, as well as the local customization values for emerging markets, taking developed countries as benchmarking. The survey is conducted with 40 public companies. Among the results, we note that companies: (a) internally calculate their cost of capital through WACC, (b) consider their current capital structure, (c) use historical interest rates of debt, (d) use nominal tax rates, (e) use financial current and long term liabilities to determine the total value of debts (f) use CAPM model for cost of equity, with benchmarking of historical data from other markets, adjusted to Brazil.

Keywords: survey, cost of capital, WACC tropicalizing, emerging markets.