To face the competition in the business environment, the company should continuously execute the capital investment to reinforce its competitive ability and to insure the endless business operation. Due to the capital investment involving huge money and long-term impact, the company should considerately and thoughtfully evaluate the financial feasibility of capital investment prior to making decision. Weighted Average Cost of Capital (WACC) is usually used as benchmark to evaluate the capital investment. WACC is made up of two key elements. The cost of equity, one of both, however, is difficult to measure. This article, taking C company as an example, is focused on how to apply 3 different models such as Dividend Growth Model (DGM), Capital Asset Pricing Model (CAPM) and Free Cash Flow Model (FCF) to compute the cost of equity as well as on analyzing the outcomes of those models. The outcomes of DGM, CAPM and FCF are respectively 11.82%, 14.2%, and 10.50%, and the highest one is the outcome computed from CAPM. The outcomes computed from both DGM and FCF are narrowly different. As compared with actual rate of return of C company stock (11.6% adjusted from ex-cash dividend and ex-stock dividend), it is found that the outcome of DGM is the nearest to actual rate of return of C company stock, then FCF¡¦s is next one and CAPM¡¦s is most different. However, on condition that the company did not distribute cash dividend in its record or stayed on the abnormal growth stage, the DGM could not be applicable. Internal capital budgeting includes expansion of production expansion, replacement, improvement and innovation. Due to the fact that the attribute of this kind of capital investment is similar to that of the company¡¦s business of line, FCF would be the most appropriate model to estimate the cost of equity to determine the WACC for the purpose of internal capital budgeting evaluation.

<p>This paper adds to the understanding and transparency of equity pricing in emerging markets. Its novel contribution is that it empirically investigates the pricing of Country Risk in BRIC markets, using a two-factor intertemporal pricing model. Bridging the gap between academics and practitioners, this paper contributes to the debate as to whether or not it is justified to adjust discount rates for emerging market companies – as given by the CAPM – by including an unconditional country risk premium. In choosing between country risk proxies, the sovereign yield spread adjusted for relative equity volatility appears to supersede the classical sovereign yield spread in explaining return variations. Evidence is presented that country risk is priced in India and China indicating some type of market segmentation; in these markets, the addition of a country risk premium to the discount rate is justified. Moreover, the paper complements the market integration literature in that it is shown that the correlation between the change in country risk premium and the equity risk premium might show signs of market segmentation or market integration, rendering the pricing factor for country risk in specific countries significant or insignificant, respectively. © 2010 Soeriowardojo, G.T. All rights reserved.</p>

This thesis seeks to address three important issues relating to the efficient functioning of the Istanbul Stock Exchange. In particular the thesis seeks to answer the following questions 1. What makes markets informationally efficient or inefficient? 2. Has increased stock market volatility had an impact on the equity risk premium and the cost of equity capital to firms? and 3. How is it possible to reconcile the view that markets are weak form efficient and technical analysis is a pervasive activity in such markets? Unlike previous studies, this thesis seeks to examine the issue of efficiency when institutional features specific to the market under investigation are taken into account. Specifically, the thesis adopts a testing methodology which enables us to recognize possible non-linear behaviour, thin trading and institutional changes in testing market efficiency. The results from this investigation show that informationally efficient markets are brought about by improving liquidity, ensuring that investors have access to high quality and reliable information and minimising the institutional restrictions on trading. In addition, the results suggest that emerging markets may initially be characterised as inefficient but over time, with the right regulatory framework, will develop into efficient and effective markets. The second important issue to be examined in this thesis concerns the impact of regulatory changes on market volatility and the cost of equity capital to firms. It is not sufficient to simply examine whether volatility has increased following a fmancial market innovation such as changes in regulation. Rather, it is necessary to investigate why volatility has changed, if it has changed, and the impact of such a change on the equity risk premium and the cost of equity capital to firms. Only then can inferences be drawn about the desirability or otherwise of innovations which bring about increases in volatility. Surprisingly, these issues have not been addressed in the literature. The evidence presented here suggests that the innovations which have taken place in the ISE have increased volatility, but also improved the pricing efficiency of the market and reduced the cost of equity capital to firms. Finally, the thesis tries to identify the conditions under which weak-form efficiency is consistent with technical analysis. It is shown that this paradox can be explained if adjustments to information are not immediate, such that market statistics, in particular statistics on trading volume contain information not impounded in current prices. In this context technical analysis on volume can be viewed as part of the process by which traders learn about fundamentals. Therefore, the thesis investigates the issue whether studying the joint dynamics of stock prices and trading volume can be used to predict weakly efficient stock prices. In summary, the findings of this thesis will be of interest to international investors, stock market regulators, firms raising funds from stock markets and participants in emerging capital markets in general. The implication of the results presented here is that informational efficient emerging markets are brought about by improving liquidity, ensuring that investors have access to high quality and reliable information and minimising the institutional restrictions on trading. In addition, the evolution in the regulatory framework of, and knowledge and awareness of investors in, emerging markets may mean that they will initially be characterised by inefficiency, but over time will develop into informational efficient and effectively functioning markets which allocate resources efficiently. In addition, the results of this thesis have important implications, for emerging markets in general, in identifying the regulatory framework that will achieve efficient pricing and a reduction in the cost of equity capital to firms operating in the economy.

Um dos reflexos esperados pela utilização da contabilidade está em uma menor assimetria informacional entre as partes, sendo capaz de afetar a performance econômica das empresas, reduzindo o custo de capital próprio das mesmas (BUSHMAN; SMITH, 2001). À vista disso, ganhos na qualidade da informação emanada pela contabilidade teriam o poder de influenciar o custo do capital próprio, diminuindo-o e elevando a performance das firmas. Com intuito de auferir tais ganhos, foi criado o International Accounting Standards Board - IASB que passou a emitir normas denominadas International Financial Reporting Standards - IFRS que, por sua vez, delimitaram uma série de medidas a serem seguidas, buscando harmonizar as práticas contábeis sob um único pilar. Entretanto, a adoção das IFRS não está desprendida das forças do mercado de capitais e da qualidade do enforcement do país adotante, não havendo uma correlação clara entre a convergência contábil e o acréscimo de qualidade. Consequentemente, o impacto da sua adoção perante a performance econômica e o custo de capital próprio também é divergente. O presente trabalho tem o intuito de avaliar os impactos sobre o custo de capital próprio das empresas brasileiras de capital aberto em função da convergência, averiguando o comportamento da taxa. Ademais, busca-se aplicar quatro metodologias de estimativa do custo de capital próprio: Ohlson Juettner-Nauroth (2005), Easton (2004), Claus e Thomas (2001) e Gebhardt, Lee e Swaminathan (2001) e confrontá-las na avaliação do impacto da adoção do IFRS no Brasil. Os resultados indicam uma redução do custo de capital próprio em três pontos base perante o modelo de Easton (2004), mas resultados não significantes para os modelos de Gebhardt, Lee e Swaminathan (2001) e Ohlson Juettner-Nauroth (2005), sendo o modelo de Claus e Thomas (2001) excluído da análise por dados insuficientes. Tais pontos predizem a necessidade de aprofundamento das pesquisas com modelos de custo implícito e ressalva se a adoção internacional foi realmente eficiente frente aos incentivos e o enforcement vigente no país. / One of the expected consequences when using accounting is a lower information asymmetry between the parties, being able to affect the economic performance of firms, reducing the cost of equity capital of them (BUSHMAN; SMITH, 2001). Thus gains in the quality of the information disclosed by accounting would have the power to influence the cost of equity capital, reducing it and increasing the performance of the firms. With the purpose of obtaining these gains, was created the International Accounting Standards Board (IASB) which began issuing accounting standards called International Financial Reporting Standards (IFRS) to delimit a range of measures to be followed, seeking to harmonize the accounting practices under one pillar. However, the adoption of IFRS is not detached from the forces of capital markets and of the adopter country enforcement, without a clear correlation between the accounting convergence and the quality increase. Consequently, the impact of its adoption on the economic performance of firms and the cost of equity capital is also divergent. This study aims to evaluate the impact on the cost of equity capital of Brazilian joint-stock companies due to the convergence to IFRS. Furthermore, the present work seek to apply four methods of estimating the cost of equity capital: Ohlson Juettner-Nauroth (2005), Easton (2004), Claus and Thomas (2001) and Gebhardt, Lee and Swaminathan (2001) confronting each one on the analysis of the IFRS adoption impacts in Brazil. The results indicate a reduction of 3 basis points in the cost of equity capital under the framework of Easton (2004), but there are no significant results for the models of Ohlson Juettner-Nauroth (2005), Gebhardt, Lee and Swaminathan (2001), which the Claus and Thomas (2001) model was excluded for enough data. These points predict the need for further development of research on implied cost of capital models and raise the question if international convergence was really efficient given the incentives and the current enforcement in the country.

Capital markets development is an integral part of overall economic growth of any country. Accounting harmonization is aimed to increase the attractiveness of capital markets by creation of synchronized financial reporting environment globally so that the capital is effectively allocated with the lowest costs and increased liquidity. To the date, more than a hundred of countries implemented IFRS into the national accounting frameworks, therefore the need for the assessment of the real impacts on capital markets is obvious. The main goal of this study is to identify whether there is statistical evidence of the relationship between decreased/increased cost of equity capital among Russian listed companies and mandatory adoption of IFRS. Theoretical part includes an overview of the relevant theory, reasons of accounting harmonization as well as potential challenges. There are also described the main findings and real evidences of adoption impacts on the main capital and financial markets. Practical part of this paper is aimed to investigate whether the proposed benefits of IFRS adoption may be similarly observed in an environment of transition economy.

Submitted final thesis aims to map calculation methods for designation of cost of equity capital. It focuses on forward-looking approaches. Its practical part is dedicated to research of risk premium and implied cost of equity capital at the level of PX-TR index representing the Czech capital market

Thesis Variants of determining the risk free rate in the business valuation is dedicated to the issue of estimating risk free rate for the calculation of the discount rate. The objective of this work is to demonstrate the influence of methods to estimate the risk free rate to business valuation based on the example of a selected company valuation. The first part is dedicated to the cost of equity, cost of debt and weighted average cost of capital. Next chapter focuses on the definition of risk-free interest rate and rating as an indicator of credit risk. The thesis also deals with theoretical methods for estimating the risk-free interest rate and their practical application. Values calculated on the basis of theoretical approaches are then applied in the calculation of the discount rate to calculate the present value of the cash flows of company.

[pt] O presente trabalho tem por objetivo descrever modelos de precificação do custo de capital próprio baseado na metodologia do CAPM e no modelo de Estrada e demonstrar a aplicabilidade destes às empresas investidoras em concessões de terminais aeroportuários brasileiros. Para isto, serão revisados os princípios adotados pelo CAPM e os principais modelos teóricos que se utilizam dessa metodologia. Foram estimados os custos de capital próprio para investimentos em concessões de terminais aeroportuários para os diversos modelos CAPM e de Estrada e estes foram comparados ao custo de capital próprio e as taxas interna de retorno modificada e não modificadas esperada para o aeroporto de Guarulhos, conforme estudo de viabilidade econômico-financeiro divulgado pela Anac. Todos os valores do custo de capital, nos diversos modelos, foram inferiores as taxas interna de retorno e em linha com o a taxa de custo de capital utilizado pela Anac, demonstrando a atratividade econômica e financeira do aeroporto de Guarulhos para os investidores. / [en] The present dissertation aims to describe the cost of equity models that are based on the CAPM methodology and the Estrada model, set out their applicability for investment in the Brazilian airport terminals concessions. To this, it will be revised the most common CAPM models and their main theory. The costs of equity were estimated for each CAPM and Estrada models for an airport terminal investment. Then, they were compared against used cost of equity rate and the internal rate of return (modified and unmodified) obtained in the Guarulhos Airport feasibility study released by Anac. It was found, for all models, that the cost of equity was lower than the internal rate of return and in line with the cost of equity rate, showing the attractiveness of the Guarulhos airport for investors.

For the last decades, public authorities and private firms have emphasized their focus on integrating sustainability into corporate disclosure. The shift towards CSR instead of the traditional profit maximization narratives is evident in increased demand among various stakeholders for sustainability awareness. Thus, financial and non-financial disclosure legislation have become stricter, forcing companies to be more transparent (European Commission, n.d.). This thesis aims to examine CSR research by arguing from a previously unattended perspective of valuation. Thus, the formulated purpose “is to examine if CSR affects the deviation between intrinsic and market value of firms in the energy sector in Europe”. This sector is highly blamed for contributing to global warming by exhausting a large amount of greenhouse gas emissions (Mezher et al., 2010). Furthermore, this thesis distinguishes itself from other valuation articles by arguing from the paradigm of realism. In doing so, we argue that the intrinsic value is the independent reality instead of the market value. The market value is, in contrast, based on investors aggregated perception of the intrinsic value through information. This separation of the two values becomes theoretically evident from the perspective of irrationality. For this aim, a few well-established theories such as the market equilibrium theory and the efficient market hypothesis have been used to theoretically explain the deviation. To establish the empirical difference of deviation, a T-test was conducted on the ten most extreme ESG score firms in the European energy sector. The applied method for calculating the intrinsic value is a perpetuity version of the Residual Earning Method with an aggregated Capital Asset Pricing Model as the discount rate. In accordance with the implied result, we argue for a significant difference in both an absolute and relative deviation in this sector. Contradicting, our second test, regression analysis, could not validate if the stated finding depends on ESG and its components. Instead, the deviation could be viewed from the control variables: Size, risk, and profitability. Thus, a theoretical explanation could be an indirect relationship of ESG towards the deviation; however, further research is needed to verificate the finding. Ultimately, we contribute on two fronts, both towards theoretical and pragmatic knowledge by arguing from an un addressed research perspective, realism and establish that high ESG firms are undervalued compared to low ESG firms.

We develop an expanded asset evaluation model dubbed the environmental, social and governance (ESG) model, which includes a sustainability factor that accounts for the value of ecological and natural capital. We incorporate a sustainability factor into the Fama-French [2015. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics 116 (1): 1–22] five-factor model plus the momentum factor. Further, we expand previous models by basing ours on microeconomic principles of value maximization and the macroeconomic principles of ecological economics. We estimate the sustainability factor premium and its factor loadings and find that following sustainable strategic management practices reduced the cost of equity by 1.6% to 2.9% per year worldwide. This implies that in 2018, sustainable strategic management practices increased world GDP by $1.3 to $2.3 trillion. Our results support previous research that there is a negative relationship between sustainability performance and the cost of capital.