7.4 The WACC Methodology
The first limitation of this methodology is really easy to
identify: this method, based on the CAPM, is really dependent on the beta of
the company studied. However, the beta cannot be calculated for non listed
companies, and it is necessary to extrapolate the results of listed companies
to obtain an appropriate beta for the small and medium farming businesses
studied in this paper. The other limitation of the method is directly linked to
the first one: the market value of the firm should be estimated by its market
capitalization. However, for non-listed companies this value cannot be
calculated. The book value used in our research cannot replace fully the market
capitalization, because it does not reflect the opinion of the market on the
company.
The second limitation of this method is the size of the farms
studied compare to the size of the listed companies used to calculate the
betas. Even if a premium was added to the betas of the listed companies, it
remains a bias not considered by the WACC methodology.
The last limitation is more linked with the choice of the
expected return. It has been chosen on purpose to adopt the risk premium to
estimate E(Rm) - Rf, in order to be able to compare the results of the two
methodologies. However, it could have chosen to use the historical results of
the farms from Isère of the first quartile (the 25% most performing
farms).
7.5 Further Research Implications
First, there is a clear necessity to intensify the research
about the optimal level of debt in Agriculture. Repeated measure statistical
tests could be used to work deeper on the subject, in order to identify more
clearly the optimal level of debt, but also to identify what are the other
factors that have a strong impact on the financial performance of farms. It
seems obvious that the productivity of farmers (number of hectares or cows per
FTE) and the surface of the farm play a great role in the results. However, it
is really hard to find quantitative research on the subject in France, at least
researches that could be used easily by financial consultants.
The other further research implication is the necessity to
test the methods presented here in the long run, in order to compare them. It
would be interesting to follow many projects evaluated with the NPV method in
order to see finally which method gave the most appropriate actualization rate.
Moreover, other methods should be tested either to identify which ones should
be chosen by practitioners. So far, this research tends to prove that the WACC
methodology can be used by consultants, even if some theoretical limitations
arose.
Finally, the same research methodology should be applied in
other departments than Isère, with other specializations also. This
would give further indications on the adaptability of the WACC methodology to
the agricultural sector. It would allow also consultants to estimate the
appropriate discount factors for farms specialized in fruits, wines or
vegetables.
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