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The Corporate Cost of Capital and the Return on Corporate Investment

Eugene F. Fama and Kenneth R. French
The Journal of Finance
Vol. 54, No. 6 (Dec., 1999), pp. 1939-1967
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/797984
Page Count: 29
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The Corporate Cost of Capital and the Return on Corporate Investment
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Abstract

We estimate the internal rates of return earned by nonfinancial firms on (i) the initial market values of their securities and (ii) the cost of their investments. The return on value is an estimate of the overall corporate cost of capital. The estimate of the real cost of capital for 1950-96 is 5.95 percent. The real return on cost is larger, 7.38 percent, so on average corporate investment seems to be profitable. A by-product of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns.

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