Adjustment by size effect on the cost of equity: Pending practice in capital budget in Colombia

This research identifies and analyzes the implications of capital budgeting techniques implemented by large, medium and small companies, related to the use and calculation of the discount rate - emphasizing in the cost of equity, adjusting it with a size premium and the calculation method of the latter- differentiating between the procedure of family and non-family businesses and the types of projects. Additionally, the same procedure is used for the viability indicators of the projects given their relevance in capital budget. For this, a descriptive analysis accompanied by contingency tables is made to a group of 182 Colombian companies. The results show that (i) only 14% of SMEs that evaluate their projects (93) adjust the discount rate with a size premium, (ii) procedures to define capital budget are more informal in family companies, (iii) expansion and replacement projects are more evaluated by family businesses, while mergers and acquisitions are more evaluated by non-family businesses, and (iv) there is little transfer of knowledge from the academy to the company.

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Hotel Business Inn

Emerald Emerging Markets Case Studies ◽

10.1108/eemcs-10-2019-0258 ◽

2019 ◽

Vol 9 (4) ◽

pp. 1-15

Author(s):

Eduardo Luis Montiel ◽

Octavio Martinez

Keyword(s):

Learning Outcomes ◽

Discount Rate ◽

Emerging Market ◽

Weighted Average ◽

Country Risk ◽

Cost Of Equity ◽

Content Type ◽

Academic Level ◽

The Cost

Learning outcomes These are the three most important learning outcomes: discuss the relevance of capital asset pricing model (CAPM) as the methodology to estimate the cost of equity for an investment in an emerging market; analyze the different alternatives to estimate country risk discussing the pros and cons of each. Consider the additional complexity in estimating the cost of equity, contrasting the perspective of a local, non-diversified investor with that of a multinational company operating in 39 countries. Case overview/synopsis The Chief Financial Officer of a business group has to determine the correct discount rate for an investment in a new hotel in Guayaquil, Ecuador. The group has traditionally used the same discount rate for all projects and is now presented with several alternatives by his team. Estimating the correct country risk adjustment for the project is an important challenge. He knows that there is no clear solution to this challenge that is accepted by all practitioners and academics, but he has to present a recommendation to the board. Complexity academic level The case study is designed for corporate finance, appraisal or international finance courses in both MBA and executive training programs. To discuss this case study, students are assumed to have been already exposed to the weighted average cost of capital and the CAPM. Supplementary materials Teaching Notes are available for educators only. Please contact your library to gain login details or email [email protected] to request teaching notes. Subject code CSS 1: Accounting and finance.

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The Cost of Equity Capital on Developing Equity Markets: Estimations for Selected Slovene Companies

South East European Journal of Economics and Business ◽

10.2478/v10033-010-0006-3 ◽

2010 ◽

Vol 5 (1) ◽

pp. 67-74

Author(s):

Igor Stubelj

Keyword(s):

Equity Markets ◽

Capital Budgeting ◽

Cash Flows ◽

Equity Capital ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Publicly Traded Companies ◽

And Performance ◽

The Cost ◽

Free Cash Flows

The Cost of Equity Capital on Developing Equity Markets: Estimations for Selected Slovene CompaniesThe article sheds light on the estimation of the cost of equity capital on a developing equity market. The cost of equity is important; it is crucial in capital budgeting decisions and performance evaluation. It determines the minimum yield the investors require on the invested capital and we use it as a discount rate to calculate the present value of the expected free cash flows to equity. The aim of this paper is to tackle the estimation of the cost of equity capital on developing markets with the example of estimation for ten Slovene publicly traded companies. The estimated cost of capital for the selected Slovene companies is between 9,7% and 13,7%.

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The impact of corporate governance on the cost of equity

Asian Journal of Accounting Research ◽

10.1108/ajar-08-2019-0062 ◽

2019 ◽

Vol 4 (2) ◽

pp. 293-314

Author(s):

Syed Tauseef Ali ◽

Zhen Yang ◽

Zahid Sarwar ◽

Farman Ali

Keyword(s):

Corporate Governance ◽

Agency Problem ◽

Capital Budgeting ◽

Coefficient Of Determination ◽

Cost Of Equity ◽

High Demand ◽

Content Type ◽

Wide Range ◽

The Cost ◽

The Impact

Purpose In view of organizational inertia, with the occurrence of a major event, though resource rigidity minimizes, however simultaneously, it increases process rigidity, which creates difficulties in motivating managers and dealing with the agency problem. Therefore, keeping in mind the high demand created by the China–Pakistan Economic Corridor and Naya Pakistan Housing Scheme in the cement sector of Pakistan, the purpose of this paper is to investigate the impact of corporate governance (CG) on the cost of equity (COE) in the cement sector, to deal with the problems surging during and after the completion of these projects and highlight further opportunities for the cement sector of Pakistan. Design/methodology/approach CG is a qualitative concept therefore, eight proxies have been used to measure it along with the two control variables. This study uses balance panel data of six years from 2012 to 2017, collected from 18 companies of the cement sector of Pakistan. Descriptive statistics have been used to describe the data, correlation matrix to see the nature of the relationship, and Pooled OLS as the estimation technique, while to analyze the data a statistical package 13 has been used. To measure the COE, the Capital Asset Pricing Model (CAPM) has been used. Findings Regression results suggest that block ownership, insider ownership and the board size are insignificant, while CEO tenure is negatively and significantly associated with the COE. Non-executive directors, independence and CEO duality are insignificant; however, diversity is positively and significantly associated with the COE. Moreover, the mean value of the COE is 8.22 percent for the cement sector, while the coefficient of determination of the model under study is 74 percent. Research limitations/implications This paper is based on the data from the cement sector of Pakistan only. Therefore, this is the reason that these results cannot be generalized on the whole economy of Pakistan. Practical implications This study helps in finding out the COE value specific to the cement sector, which will help this sector to evaluate the capital budgeting decision more precisely and accurately than before. Moreover, the association of diversity as positive, while independence as negative with the COE highlights a room for improvement in the implementation of CG codes by SECP. This study also helps to mitigate the impact of inertia, the after-effects of high demand, and managing the agency problem in the cement sector. Originality/value This is the first study using CG data collected just after the revised promulgation of CG codes in 2012, along with a wide range of eight proxies measuring CG and its impact on the COE in the cement sector.

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The Use Of Capital Budgeting And Cost Of Capital Estimation Methods In Swedish-Listed Companies

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v28i6.7354 ◽

2012 ◽

Vol 28 (6) ◽

pp. 1451 ◽

Cited By ~ 4

Author(s):

Fredrik Hartwig

Keyword(s):

Cost Of Capital ◽

Capital Budgeting ◽

Listed Companies ◽

Common Method ◽

Estimation Methods ◽

Cost Of Equity ◽

Project Risk ◽

Cross Country ◽

The Cost

In this paper Swedish listed companies use of capital budgeting and cost of capital estimation methods in 2005 and 2008 are examined. The relation between company characteristics and choice of methods is investigated and both within-country longitudinal and cross-country comparisons are made. Larger companies seem to have used capital budgeting methods more frequently than smaller companies. When compared to U.S. and continental European companies, Swedish listed companies employed capital budgeting methods less frequently. In 2005 the most common method for establishing the cost of equity was by asking the investors what return they required. By 2008 CAPM was instead the most utilised method, which could indicate greater sophistication. The use of project risk when evaluating investments also seems to have gained in popularity, while the use of company risk declined. Overall, the use of sophisticated capital budgeting and cost of capital estimation methods seem to be rising and the use of less sophisticated methods declining.

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Disclosure Of EVA Use In Corporate Financial Reports: A Descriptive Analysis

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v21i1.1502 ◽

2011 ◽

Vol 21 (1) ◽

Author(s):

WaQar I. Ghani ◽

Ahmet Tezel ◽

Joseph M. Ragan ◽

A. J. Stagliano

Keyword(s):

Intrinsic Value ◽

Estimation Error ◽

Descriptive Analysis ◽

Equity Capital ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Font Size ◽

Decision Context ◽

Public Disclosures ◽

The Cost

This descriptive study examines a sample of 269 firms that mentioned EVA in their public disclosures.  The key findings of our study are: (1) the use of EVA is found in a cross-section of the industries; (2) the most commonly used source of disclosure is the proxy statement; (3) a majority of the firms use only EVA rather than EVA in combination with other traditional measures; (4) a majority of the sample firms apply EVA at the corporate level alone; (5) three-fourths of the sample firms use EVA as an incentive compensation tool; (6) most firms apply EVA and other metrics only at the executive level for compensation and performance evaluation; and (7) two common modes of compensation using EVA determination are bonus plans and stock options.  The results of our study indicate that firms are steadily adopting EVA as one component of their value management system.  In a related decision context, investors estimate the cost of equity capital to arrive at the intrinsic value of the firm.  Firms can help investors reduce this estimation error by reporting their own estimate of the cost of equity capital, in turn, reducing the valuation error. Our findings have implications for the Securities and Exchange Commission and the Financial Accounting Standards Board in that they should recognize the need to address this issue thereby enhancing the decision usefulness of public reporting.

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International Real Estate Review

International Real Estate Review ◽

10.53383/100286 ◽

2019 ◽

Vol 22 (3) ◽

pp. 399-430

Author(s):

Francesco Busato ◽

◽

Cuono Massimo Coletta ◽

Maria Manganiello ◽

◽

...

Keyword(s):

Real Estate ◽

Factor Model ◽

Five Factor Model ◽

Estimation Method ◽

Capital Budgeting ◽

Equity Capital ◽

Forecast Errors ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

The Cost

One of the fundamental concepts in financial economics is the cost of equity capital. The cost of equity is an important tool often used by a firm as a capital budgeting threshold for the required rate of return. The cost of equity of a firm also represents the compensation the market demands in exchange for owning the asset and bearing the risk of ownership. This paper focuses on the cost of equity capital estimates for a particular U.S. industry, the real estate investment trust (REIT) industry, to highlight the key role played by the choice of estimation method on the distant forecast. By using a comprehensive sample of 51 REITs over the period of January 1997 to December 2014, we compare the ¡§hybrid beta¡¨ approach developed by Cosemans et al. (2016) with the Carhart four-factor model, the REIT-factor model in Chen et al. (2012) and the five-factor model formulated by Fama and French (2015). Our results demonstrate the superiority of the ¡§hybrid beta¡¨ approach, which almost always produces, at the firm and portfolio-levels, absolute forecast errors that are lower than those of the other models implemented in our study.

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Risk-Adjusted Discount Rate and Its Components for Onshore Wind Farms at the Feasibility Stage

Energies ◽

10.3390/en14206840 ◽

2021 ◽

Vol 14 (20) ◽

pp. 6840

Author(s):

Piotr W. Saługa ◽

Krzysztof Zamasz ◽

Zdzisława Dacko-Pikiewicz ◽

Katarzyna Szczepańska-Woszczyna ◽

Marcin Malec

Keyword(s):

Discount Rate ◽

Wind Farm ◽

A Priori ◽

Flow Analysis ◽

Wind Farms ◽

Capital Budgeting ◽

Cost Of Equity ◽

Discussion Section ◽

Onshore Wind ◽

Starting Point

The concept of risk is well known in the energy sector. It is normally recognized when it comes to price and cost forecasting, annual production calculation, or evaluating project lifetime. Nevertheless, it should be pointed out that the quantitative evaluation of risk is usually difficult. The discount rate is the only parameter reflecting risk in the discounted cash flow analysis. Therefore, knowledge of the discount rate along with the major components affecting its level is of fundamental significance for making investment decisions, capital budgeting, and project management. By referring to the standard coal-fired power generation projects the authors of the paper tackle the analysis of the composition of discount rate for onshore wind farm technologies in the Polish conditions. The study was carried out on the basis of a typical (hypothetical) onshore wind farm project assessed at the feasibility stage. To enable comparisons and discussions, it was assumed that the best reference point for such purposes is the real risk-adjusted discount rate, RADR, after-tax, in all equity evaluations (the ‘bare bones’ assumption); that is because such a rate reflects the inherent characteristics of the project risk. The study methodology involves the a priori application of the discount rate level and subsequently—in an analytical way—calculation of its individual components. The starting point for the analysis of the RADR’s composition was the definition of risk, understood as the product of uncertainty and consequences. Then, the risk factors were adopted and level of uncertainty assessed. Subsequently, using the classical sensitivity analysis of IRR, the consequences (as slopes of sensitivity lines) were calculated. Consequently, risk portions in percentage forms were received. Eventually, relative risks and risk components within cost of equity were assessed. Apart from the characteristics of the discount rate at the feasibility stage, in the discussion section the study was supplemented with an analogous analysis of the project’s cost of equity at the operating stage.

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Estimating the Size Premium and the Cost of Equity Capital for Korean Listed Companies

THE KOREAN JOURNAL OF FINANCIAL MANAGEMENT ◽

10.22510/kjofm.2015.32.3.005 ◽

2015 ◽

Vol 32 (3) ◽

pp. 107-142 ◽

Cited By ~ 1

Author(s):

Sekyung Oh ◽

Park Kinam

Keyword(s):

Listed Companies ◽

Equity Capital ◽

Cost Of Equity Capital ◽

Cost Of Equity ◽

Size Premium ◽

The Cost

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A new perspective on the size, value, and momentum effects

Review of Accounting and Finance ◽

10.1108/raf-05-2015-0065 ◽

2016 ◽

Vol 15 (2) ◽

pp. 222-251 ◽

Cited By ~ 1

Author(s):

James Foye

Keyword(s):

Stock Returns ◽

Design Methodology ◽

Factor Models ◽

Cost Of Equity ◽

Content Type ◽

Size Premium ◽

Fama And French ◽

New Perspective ◽

The Cost ◽

Country Specific

Purpose This paper aims to provide a comprehensive analysis of whether stock returns in Europe are best characterized by country-specific or Europe-wide versions of widely used factor models. Design/methodology/approach To estimate the cost of equity in Europe, both region-wide and nationally, the Fama and French (2012) three-factor and Carhart (1997) four-factor models are used. Findings The results show that although the value and momentum premiums are present on a Europe-wide basis, the size premium is country-specific. Originality/value The paper offers an explanation to the puzzle of why Fama and French (2012) detect value and momentum premiums but no size premium in Europe. Furthermore, the results shed new light on these premiums and present a challenge to existing applications of widely used factor models.

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STOCK EXCHANGE LISTING INDUCES SOPHISTICATION OF CAPITAL BUDGETING

Revista de Administração de Empresas ◽

10.1590/s0034-759020140509 ◽

2014 ◽

Vol 54 (5) ◽

pp. 560-574 ◽

Cited By ~ 3

Author(s):

WESLEY MENDES-DA-SILVA ◽

RICHARD SAITO

Keyword(s):

Stock Exchange ◽

Capital Budgeting ◽

Listed Companies ◽

Chief Financial Officers ◽

Cost Of Equity ◽

The Cost ◽

Budgeting Process

This article compares capital budgeting techniques employed in listed and unlisted companies in Brazil. We surveyed the Chief Financial Officers (CFOs) of 398 listed companies and 300 large unlisted companies, and based on 91 respondents, the results suggest that the CFOs of listed companies tend to use less simplistic methods more often, for example: NPV and CAPM, and that CFOs of unlisted companies are less likely to estimate the cost of equity, despite being large companies. These findings indicate that stock exchange listing may require greater sophistication of the capital budgeting process.

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