User cost, capital utilization and investment theory jstor. The cost of capital is the companys cost of using funds provided by creditors and shareholders. To analyse how inflation affects capital cost we will use the model presented in. A related effective average tax rate is also defined for the context in which the firm obtains economic rents that is, earnings above those needed for it to remain in. Download free pdf study materials in financial management. Measuring capital oecd manual second edition capital in particular of the physical sort plays several roles in economic life. Cost of capital has different connotations in different economic philosophies. In a perfect capital market, where all borrowers and lenders pay and receive a uniform interest rate, the explicit interest cost of loanfinanced investment equals the implicit forgoneinterest cost of selffinanced investment, so the cost is the same whether the firm finances through borrowing or internally. Oecd glossary of statistical terms user cost of capital. The expression on the righthand side of 6, the implicit rental price of capital, is commonly referred to as the user cost of capital. Pdf interest rates, user cost of capital, and housing price.
A companys cost of capital is the cost of its longterm sources of funds. The user cost of capital is the unit cost for the use of a capital asset for one periodthat is, the price for employing or obtaining one unit of capital services. This paper examines the impact of capital market efficiency on economic growth in india using the time series data on market capitalization, total market turnover and stock price index over the. Y since v is between 2 and 3 that is, the capital stock is 2 or 3 times. This pdf is a selection from an outofprint volume from the national bureau of economic research. In the framework of chapter 4, this was just the interest rate the cost of. The user cost of capital is also referred to as the rental price of a capital good, or the capital service price. Note that when there are changes in the netoftax price of investment goods from changes in p, c, z, or itc, the user cost becomes rising investment good prices reduce the cost of capital, rising tax subsidies z, itc raise the cost of capital. The pace and pattern of business investment in fixed capital are central to our understanding of economic activity. And the cost of each source reflects the risk of the assets the company invests in. This is the standard user cost of capital expression. For example, a project requires an investment of rs. I0 book value of investment in the beginning, in book value of investment at the end of n years.761 780 1416 760 1466 217 1125 85 255 711 1064 673 779 534 141 440 1036 1419 1507 849 223 879 35 1144 156 478 1330 131 492 206 1099 355 838 401 1001 317 514 48 1386 935 766 606 175 1368 635 1251 545