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The Corporate Cost of Capital and the Return on Corporate Investment

Eugene F. Fama 

University of Chicago - Booth School of Business (Finance Authors)

Kenneth R. French 

Dartmouth College - Tuck School of Business ; National Bureau of Economic Research (NBER) 
April 1998

CRSP Working Paper 

Abstract:      
We estimate two internal rates of return for the non-financial corporate sector: (i) the return on the initial market values of the securities issued by firms, and (ii) the return on the cost of their investments. The return on cost is the return delivered by firms on investment outlays. The return on value is an estimate of the overall corporate cost of capital, that is, the return on investment required by the capital market. The estimate of the corporate cost of capital for 1950-96 is 10.72 percent. The return on cost is larger, 12.11 percent, so on average corporate investment seems to be profitable. A byproduct of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns themselves.