Timothy A. Luehrman

Real interest rates and the cost of capital : A comparison of the United States and Japan

Abstract Previous studies have reported a lower cost of capital in Japan than in the United States and attributed the difference to lower real interest rates in Japan. This paper argues that the approach employed in previous studies is biased in favor of the hypothesis that Japanese capital costs are lower. The paper employs an alternative approach. It presents rational expectations tests of the hypothesis that real riskless interest rates are equal across the two countries. The hypothesis that real riskless rates are equal is rejected by data from the period 1976–1985. Although real riskless rates are not equal, the difference favored the U.S. as often as Japan, and by equal orders of magnitude during the decade 1976–1985. The results therefore do not support the nation that Japan has consistently benefitted from lower costs of capital over the decade. Forward parity and ex ante purchasing power parity are also rejected by the data, though these rejections need not imply unexploited financial market opportunities and therefore cannot be said to have caused the differences in real interest rates.

The price of risk in the United States and Japan

Abstract This study compares the price of risk in the United States and Japan to determine whether differences, if they exist, provide formal support for the widespread perception that capital costs are lower in Japan. The paper compares realized monthly excess returns on value-weighted market portfolios in each country to various measures of risk for each during the period 1982–1986. The data fail to reject the hypothesis that the price of risk is the same in both countries. For most model specifications, the estimated price of risk is (insignificantly) higher for the Japanese market. These and other recent results suggest that realized returns from capital markets cannot document a difference in capital costs during the mid-1980s. Noise and heteroskedasticity in equity returns data for both countries prevent the detection of a significant difference in the price of risk, if one existed.

Uso do VPA: uma ferramenta melhor para a avaliação de operações

One of the most disseminated ways of valuing operating assets is discounted Cash flow, or DCF. But weighted average cost of capital, or WACC - one of the most commonly accepted forms of DCF - has become obsolete. This article discusses an alternative to WACC known as adjusted present value, or APV. The article shows that this new methodology is greatly superior to WACC, due specially to the fact that it provides additional managerially relevant information at lower error levels, helping executives determine not only how much an asset is worth, but also where its value comes from.