The 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%.
In the work, the subject of the discount rate assessment is presented. The discount rate is usually considered as constant in the whole investment period, which seems to be the main problem. The constant discount rate does not take into account the actual money loses value in time. Moreover, the discount rate elements can change in time, and it should be remembered that many factors, which could also change, influence the value of those elements. The research confirms that the assumption of using the constant discount rate is erroneous. In the work one can find i.a. the methods of own capital assessment or the proposal of different techniques of risk premium valuation.
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