The Corporate Cost of Capital and Financial Investment in New Zealand

We have estimated the cost of capital for the New Zealand listed non-finance corporate sector by the corporate internal rate of return method adopted by Fama and French (1999). The real IRR on value is 3.61% and IRR on cost is 5.15%. An industry analysis revealed large differences in returns, with four out of five industry sectors achieving positive real IRRs. The cash flows component analysis reveals that on average, New Zealand firms generated income equal to 5.26% of beginning year book value, which is much less than the comparable US rate of 8.83% (Fama and French, 1999). Mirroring this income difference, the issuance of equity by New Zealand companies equaled 5.57% of the beginning book value, greatly exceeding the US rate of 0.81% (Fama and French, 1999). Although New Zealand firms tend to place more reliance on equity issues to finance their total investment needs, changes to their requirements tend to be exercised using debt. The methodologies employed here could be directly applied to study the corporate sectors in other countries.