Interest on Equity Capital as an Ex Post Cost: A Comment/A Reply/A Rejoinder

In a 1980 article, Lloyd Amey argued against the proposition that net income should be defined after deduction of interest on equity, as well as on borrowed capital. Zafiris argues that economic considerations favor the proposed reform, and that those considerations fail to justify a blanket allowan...

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Bibliographic Details
Published in:Journal of business finance & accounting 1982-04, Vol.9 (1), p.119
Main Authors: Zafiris, Nicos, Amey, Lloyd R
Format: Article
Language:English
Subjects:
Costs
Equity capital
Interest
Mathematical analysis
Opportunity costs
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Summary:In a 1980 article, Lloyd Amey argued against the proposition that net income should be defined after deduction of interest on equity, as well as on borrowed capital. Zafiris argues that economic considerations favor the proposed reform, and that those considerations fail to justify a blanket allowance of interest as a cost of equity capital. Amey replies that Zafiris' proposed performance measure is flawed. He holds that Zafiris misinterprets Buchanan (1969) with respect to the notion of ''opportunities lost.'' He disagrees with the idea that a measure valid at the divisional level is valid for the whole company, and questions the implication that residual income is a conceptually valid way of assessing divisional performance. Zafiris grants that Amey's reply narrows the areas of disagreement. But major disagreement remains as to the desirability of some financial profit measure which would allow for opportunity costs reevaluated with hindsight and the necessary updating of the cost data against an ex post standard. Zafiris maintains that the ultimate question remains what purpose profit measurement is to serve.
ISSN:0306-686X
1468-5957