The cost of capital finance and investment

Quarterly Bulletin 1976 Q2
Published on 01 June 1976

This is a research article prepared mainly by J. S. FIemming (who was with the Bank on leave from Nuffield College, Oxford), L. D. D. Price and Mrs S. A. Byers.
An earlier article described how the profitability of industrial and commercial companies, as measured by their real rate of return on physical capital, had declined in recent years. The aim of the present article is to develop a comparable measure of the 'cost of capital' - that is, the cost to the company of the finance needed to acquire the physical capital. If profitability and the cost of capital are measured in a consistent manner, the relationship between the two should give a guide to companies' incentive to invest in new physical capital.

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