International Journal of Entrepreneurship (Print ISSN: 1099-9264; Online ISSN: 1939-4675)


Estimation cost of equity under small open integrated economy

Author(s): Dana Dluhosova, Antonin Poncik, Jan Poremski & Zdenek Zmeskal

The paper is focused on the equity cost of capital estimation. It is one of the crucial problems of financial management. Correct cost estimation influence the correctness and validity of financial decision-making in many aspects. Special conditions of estimation exist in small open economies. Usually, the stock exchange is small and with lower liquidity; foreign trade encompasses a significant part of GDP. Therefore, proxy accounting methods are often applied. However, the market methods are more precise and valid. So, the paper's objective is to verify the possibility to estimate the cost of equity models under the Czech capital market by the Capital Assets Pricing Model (CAPM) and the three-factor Fama French model (FFM) and analyse the validity of the models. The literature review is done. Methods of cost of equity estimation are described, and data and computation procedures are presented. The estimated models in the Czech stock exchange were predominantly statistically significant and relatively well fitted. The results can be used in the financial decision-making of listed companies. Furthermore, it can be used as a basis for applying proxy accounting methods of non-listed companies. It was found and verified that the equity cost of capital by market methods can be estimated and is fruitful under the small open, integrated economy conditions on the liquid stock exchange's condition.

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