Measuring the Cost of Capital in Australia

The cost of capital is the minimum rate of return that an investment project must earn in order to cover its funding costs and any tax liabilities. Australian studies on this subject have produced a wide range of estimates. This paper demonstrates that a wide range of outcomes can result from often arbitrary assumptions used in constructing measures of the cost of funds. The paper suggests that any conclusions drawn about intertemporal trends or international comparisons of the cost of capital should be treated with care. For managers, it serves as a reminder that the use of simple invariant rules-of-thumb for investment decisions may be inappropriate. In particular, changes of tax regime and inflation should be taken into account in setting ‘hurdle rates’ for investment proposals.

The Cost of Capital: Some Issues

The cost of capital is a potentially important determinant of business investment, yet there have been few attempts to provide an adequate measure of it. In this paper the importance of the cost of capital and weaknesses inherent in existing measures are discussed. A new series for the cost of capital is then constructed according to the methodology developed by Carmichael and Stebbing (1981). The measure of the cost of capital developed in this paper incorporates the cost of both debt and equity finance. It also allows for changes in corporate tax rates, expected inflation and changes in sources of finance. It appears that, following large fluctuations in the cost of capital during the 1970s, the series may have again become more stable, but at a higher average level than was evident during the 1960s.

The Role and Consequences of Investment in Recent Australian Economic Growth

By international and historical standards, Australia does not appear to be under-capitalised. Nevertheless, the past decade has seen a clear reversal of the steady upward trend in capital intensity; this reversal was most marked after the short-lived increase in capital spending associated with improved prospects in Australia's resource-intensive industries in the early 1980s. Since then, there has been a sharp decline in investment relative to GDP, as reductions in real labour costs relative to capital costs encouraged the substitution of labour for capital. The existence of excess capacity in the early 1980s meant that substitution of labour for investment in new capital was possible without a major slowdown in growth of economic activity or employment. The prospects for continued economic growth depend, in part, on the resumption of investment spending to complement the growth of labour. It will be important for investment to occur in those industries where recent gains in competitiveness have been greatest. Prospects for achieving these outcomes will be enhanced if government policies are directed towards further reducing distortions in investment incentives, encouraging the expansion of technology and providing a mix of overall stabilisation policies that reduces pressures on capital markets.

Quantifying honey bee mating range and isolation in semi-isolated valleys by DNA microsatellite paternity analysis

Honey bee males and queens mate in mid air and can fly many kilometres on their nuptial flights. The conservation of native honey bees, such as the European black bee (Apis mellifera mellifera), therefore, requires large isolated areas to prevent hybridisation with other subspecies, such as A. m. ligustica or A. m. carnica, which may have been introduced by beekeepers. This study used DNA microsatellite markers to determine the mating range of A. m. mellifera in two adjacent semi-isolated valleys (Edale and Hope Valley) in the Peak District National Park, England, in order to assess their suitability for native honey bee conservation and as isolated mating locations. Three apiaries were set up in each valley, each containing 12 colonies headed by a virgin queen and 2 queenright drone producing hives. The virgin queens were allowed to mate naturally with drones from the hives we had set up and with drones from hives owned by local beekeepers. After mating, samples of worker larvae were taken from the 41 queens that mated successfully and genotyped at 11 DNA microsatellite loci. Paternity analyses were then carried out to determine mating distances and isolation. An average of 10.2 fathers were detected among the 16 worker progeny. After correction for non-detection and non-sampling errors, the mean effective mating frequency of the test queens was estimated to be 17.2, which is a normal figure for honey bees. Ninety percent of the matings occurred within a distance of 7.5 km, and fifty percent within 2.5 km. The maximal mating distance recorded was 15 km. Queens and drones did occasionally mate across the borders between the two valleys, showing that the dividing mountain ridge Losehill does not provide complete isolation. Nevertheless, in the most isolated part of Edale sixty percent of all matings were to drones from Edale hives. The large majority of observed mating distances fell within the range of Hope Valley, making this site a suitable location for the long term conservation of a breeding population of black bees