The cost of capital, the dividend decision and aspects of South African practice

Abstract

The objective in this article is to report on the role of the cost of capital when financial managers perform valuations in order to take a dividend decision. The dividend decision has been the subject of considerable debate with numerous models, theories, and considerations covering a wide spectrum being proposed and criticized as academicians argue the merits, relevance, and irrelevance of the dividend decision. Despite the lack of agreement as to the relevance of the dividend decision, the relevance of the cost of capital is not, per se, the subject of the dividend debate - it is central to the debate. In an attempt to establish the role and function of the cost of capital with regard to the dividend decision in South Africa, an empirical survey of all firms listed on the Johannesburg Stock Exchange was conducted. From this survey it is apparent that for the majority of the respondents the cost of capital does not have a formal or explicit impact on the dividend decision.