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JOURNAL OF ACCOUNTING AND FINANCE
Cost of Capital and Capital Budgeting for Privately-Held Firms:
Evidence from Business Owners Survey
Author(s): Maretno A. Harjoto, John K. Paglia
Citation: Maretno A. Harjoto, John K. Paglia, (2012) "Cost of Capital and Capital Budgeting for Privately-Held Firms: Evidence from Business Owners Survey," Journal of Accounting and Finance, Vol. 12, Iss. 5, pp. 71 - 85
Article Type: Research paper
Publisher: North American Business Press
Abstract:
This study reveals characteristics of privately owned firms and factors that influence capital budgeting decisions made by business owners. On average, private businesses employ 25% debt with an average corporate tax rate of 32% and a weighted average cost of capital of 16.67%. Business owners who receive funding from family and friends tend to rely on “gut feel” and market analysis to guide their investment decisions while business owners who prepare an annual budget, engage in planning beyond the current year, and have a solid growth strategy are more likely to use quantitative capital budgeting methods.
