Date of this Version
Cornhusker Economics (February 19, 2014)
It is important for a cooperative to assign an appropriate cost to the equity capital its members provide. Because cooperatives usually do not issue publicly traded capital stock, there is no market value on which they can base the cost of equity. In addition, cooperatives generally do not pay dividends on equity certificates representing retained patronage refunds. Consequently, it is easy for them to undervalue the cost of equity, which can cause them to rely too much on equity capital and underestimate overall capital costs. That can result in capital costs that are higher than necessary and overinvestment in assets. A cooperative that undervalues the cost of equity is also less likely to retire member equity in a timely manner so an unfair share of the costs of financing the organization is borne by individuals who no longer benefit from its services.