Identifying the Factors Affecting the Cost of Capital and Determining an Appropriate Model for Calculating the Cost of Capital

Transcription

1 J Basc Appl Sc Res, (3)765-77,, TetRoad Publcato ISSN Joural of Basc ad Appled Scetfc Research wwwtetroadcom Idetfg the Factors Affectg the Cost of Captal ad Determg a Approprate Model for Calculatg the Cost of Captal Sardar Esmaeelzadeh, Mohammad Ahmadfard, Mehrdad Bousta * Departmet of Maagemet, Abhar Brach, Islamc Azad Uverst, Abhar, Ira ABSTRACT Ths paper vestgates the relatoshp betwee the selected depedet varables (sze of compa, debt rato, level of dsclosure, ad tpe of dustr) ad depedet varable (cost of captal) For ths purpose, the quattatve requred formato ad data have bee etracted from the facal statemets of compaes lsted Tehra Stoc Echage, ad the statstcal populato of about 9 elgble compaes has bee chose usg a classfcato samplg method For data aalss, frst the cost of captal was calculated through fve models troduced the research ad the the sgfcace test was doe for determg the dffereces results of models The the calculatos were performed usg the ecel software, ad the statstcal softwares sasspss- were used for the statstcal aalss The results of research dcate that the accoutg evaluato model s cosdered as the most approprate model for calculatg the captal cost, ad tpe of dustr ad the sze of compa are selected as the factors affectg the cost of captal KEWORDS: Cost of captal; captal; level of dsclosure; sze of compa; debt rato; tpe of dustr INTRODUCTION Decso-mag ad selectg the optmal solutos for fuds vestmet ad the cost of captal are the maor ssues the facal lterature order to crease the total value of ecoomc ut I ths regard, the facg ssue s cetre stage geeral, ad the cost of captal partcular; ad ths stud teds to vestgate ths two topcs Facg the ecoomc uts s doe b dfferet was ad usg the multple sources Several factors are volved selectg the best facg optos ad the most mportat oes are the facg costs or epeses whch are amed as the cost of captal the facal lterature Ivestors cludg the shareholders ad log-term loas ad facal facltes supplers as vest ther captal or moe accept mplctl the rs of ot recevg t Rs tag has a drect relatoshp wth the cost of captal level Whle vestors trasfer the resources uder ther cotrol, admt the prce of possble rss ad demad a fee for ther epected proft, so the total of these two forms the epected retur for the vestor Therefore, the cost of captal s the mmum rate of retur whch ecoomc ut must be acheved order to meet the vestors epected retur Issue Statemet Cost of captal s oe of the cocepts whch have alwas bee cosdered b the facal eperts ad s the ma factor creatg gap betwee the accoutg proft ad the ecoomc proft Captal cost s mportat two aspects; frst, all securtes assessmet models are based o the cost of captal Noe of the assessmet models from the smplest model to the most comple oe- s based ust o the cost of captal; therefore, wthout the cost of captal model, we caot be optmstc about the securtes assessmet models Secod, fuds vestg b the compa ad determg the vestmet prortes ad the optmal captal structure would ot be feasble wthout determg the cost of captal rate, so that evaluatg techques whch are based o the tme value of moe, havg the rate of captal cost s a deal ecesst The valdt of cost of captal models s measured va three methods the facal lterature I the frst method for valdatg the model s the correlato test of cost of captal whch s calculated b the sstematc rs (beta) de The secod method for model valdato s whe the calculated value s close to the prce of stoc maret; ad the thrd method for the model valdato s the effectveess test for the cost of captal b the factors whch are ow as the factors that affect the vestmet cost the facal lterature Each model, whch s more affected b these factors, s more relable The sze of compa, level of dsclosure, tpe of dustr, ad the debt rato are the factors whch affect the cost of captal the facal researches, ad these factors have dfferet degrees terms of cotrollablt, so that some factors are cotrollable for the ecoomc ut ad the others are ucotrollable Ths research ams to stud the cotrollable factors Two methods have bee proposed techcall for chagg the prce of securtes the facal lterature Frst, chagg the prce of stoc maret b mapulatg or chagg the profts; ad secod, chagg the prce b *Correspodg Author: Sardar Esmaeelzadeh, Departmet of Maagemet, Abhar Brach, Islamc Azad Uverst, Abhar, Ira Emal: esmaelzadeh@abharauacr 765

2 Esmaeelzadeh et al, the chages the epected rate of retur; the secod method s the subect for the cost of captal whch s cosdered ths stud Research Bacgroud There have bee coducted relatvel large umbers of researches about the cost of captal ad ths wll mae the lterature of subect rcher Westo (959) also acheved a acceptable correlato betwee the facal leverage ad the cost of captal b teractg two varables of sze ad growth, ad cocluded that there s a verse relatoshp betwee the facal leverage ad the cost of captal I ths regard, Barges (963) studed the relatoshp betwee the cost of captal ad the facal leverage three dustres cludg the ralroad, cemet ad large cha stores He cocluded hs research that the average cost of captal frst s decreased b creasg the facal leverage ad the t wll be creased There have bee coducted useful researches about the level of dsclosure ad the cost of captal ad the ca be dvded to two groups Frst group cotas the researches whch have led to ths cocluso that the creased dsclosure reduces the cost of captal Studes coducted b Demsetz (968) ad Gala (983) are classfed ths group The secod group cotas the studes whch prove these clams that the cost of captal has a drect relatoshp wth the dsclosure; t meas that the creased dsclosure wll lead to hgher cost of captal Kle ad Bawa (976) ad also Barr ad Braw (986) have coducted studes whch are classfed ths group Accordg to a research coducted b Botosa (99) there s a relatoshp betwee the volutar dsclosure ad the shareholders cost of captal He acheved to two results hs studes The frst result s that the volutar dsclosure reduces the shareholders cost of captal; secod, there s a verse relatoshp betwee the dsclosure ad the cost of captal the compaes whch a few facal aalsts wor o ther stoc, but compaes whch umerous facal aalsts wor o ther stoc, there s a sgfcat relatoshp betwee the dsclosure ad cost of captal Log ad Ludholm (993) ther stud foud that there s a drect relatoshp betwee the dsclosure ad sze of compa; t meas that the larger a compa s, the more ts level of dsclosure s creased Partha Segupta (998) studed the relatoshp betwee the qualt of corporate dsclosure ad ther debt cost ad cocluded that the more the qualt of dsclosure s, the less ther debt costs wll be Research Hpotheses Ths research studes the relatoshp betwee the selected depedet varables (sze of compa, debt rato, level of dsclosure, ad tpe of dustr) ad the depedet varable (cost of captal) ad revews the relatoshp betwee the sze of compa, debt rato, level of dsclosure, ad tpe of dustr ad the cost of captal Research Obectves Research obectves are summarzed as follows: Determg the relable model(s) for calculatg the cost of captal Idetfg the factors affectg the cost of captal 3 - Determg a bass for selectg the optmal captal structure METHODOLOG B) Research Method: Ths epermetal stud s classfed the feld of facal ad accoutg postve theores The emprcal ad quattatve evdece wll be collected ad aalzed b the Cross Sectoal Correlato ad the theorzato wll be doe through the ductve method B) Iformato ad Data Collecto methods: Quattatve data ad formato, eeded for ths stud, are etracted from the facal statemets of compaes lsted the Tehra Stoc Echage, ad the are avalable b dfferet was Moreover, data related to the theoretcal bases of research are collected ad aalzed b the lbrar method C) Statstcal populato, samplg method, ad sample sze: Statstcal populato ths stud cotas the compaes lsted Tehra Stoc Echage From all elgble compaes, 86 compaes were selected as the samples usg the stratfed samplg - I order to elmate the effects of seasoal fluctuatos, the facal perod should be eded Esfad - The should have provded the prelmar data eeded for ths stud for stoc echage a 6-ear perod (383 to 388) 3- Ther actvt should be productve terms of creased comparablt of selected samples The vestg compaes wll ot be selected as the samples due to the dfferece the ature of ther actvtes 766

3 J Basc Appl Sc Res, (3)765-77, 4 - Compa should ot have bee govermetal or o-afflated to the govermetal publc sttutos I the other words, maagemet of compa should be a prvate D) Methods of data aalss For data aalss, frst the cost of captal s calculated through fve models preseted ths stud, ad the the sgfcace test of dffereces the results of models s doe If there s o sgfcat dfferece betwee the results of these models, oe of the models are used as the de model, but f the dfferece betwee the models was sgfcat, the de model should be selected accordg to the logc the facal lterature ad the research process should be cotued based o t Cost of captal calculated the multvarate regresso model s cosdered as the depedet varable; ad the effects of depedet varables cludg "the level of dsclosure, sze of compa, debt rato, ad tpe of dustr", whch are ratg, umerc, ad omal, o the depedet varable wll be put to the test Calculatos were performed usg the ECEL software ad the statstcal softwares SAS, SPSS- were used for the statstcal aalss Deftos of cocepts ad specfc words of proect Captal: Captal s the equt plus the log term debts wth terest Cost of Captal: Cost of captal s the mmum rate of retur through whch the value of compaes wll rema costat, ad t s calculated through the captal supplers epected rate of retur Optmal captal structure: Optmal captal structure s a combato of facal resources b whch the average combato of corporate cost of captal wll be reduced to the least level Dsclosure: I ths stud, dsclosure meas provdg the aual facal audted formato of compaes for the Stoc Echage Sze: I ths stud, sze meas the atural logarthm of average sellg prce, maret prce of equt ad boo value of total assets Debt rato: the rato of debt s the rato of debts to the equt Research Lmtatos Lmtatos whch est coductg ths stud ad should be cosdered terpretg the results of research ad ts geeralzato are as follows: - Lac of effcec the captal maret of Ira s as a cofoudg factor whch ca affect the results of research ad t s mpossble to be cotrolled b the researcher Ths subect s oe of the problems mplemetg the studes whch are based o the captal maret such as the curret stud - Access to the eteral scetfc sources ad supplg the ecessar formato about the compaes lsted the Stoc Echage has bee the most mportat lmtato whch researcher has bee ecoutered 3 - Due to the lac of atoal accoutg stadards utl 378, the qualt of used facal formato ad the effects of dffereces the accoutg methods o measurg ad reportg the facal evets ma affect the results 4 The pauct of compaes estg the Stoc Echage s aother possble lmtato of ths stud whch affects the possblt of geeralzg the results 5 The facal statemets have bee used as reported b compaes Sce the audtg report of most compaes has bee codtoal ad there has ot bee a modfcato for ths case due to the lac of access to the formato, the possble effects of these modfcatos o the results of predcto are uclear The aual modfcatos (Errors modfcatos of past courses) are the most sgfcat cases the facal statemet of compaes 6 - Access to the formato of compaes has bee led to the umerous problems ad requred spedg the log tme Tehra Stoc Echage has o comprehesve database, ad the corporate facal reports are recorded coheretl ad rregularl Dea Sahm ad Sahra databases also do ot have the formato about some ears ad compaes, ad trasferrg the data from the corporate facal statemets to these bas has bee resulted wth errors However, cotrols have bee doe order to esure partl the accurac of formato Calculatg the Cost of Captal Cost of Captal cludes the cost of compoets whch form the captal ad the sum of corporate captal structure The maor compoets of captal structure are the debt wth terest, preferred stocs, retaed eargs ad commo stocs Sce the owers of each of the sources have ther ow epected rate of retur, the also have a dfferet cost ad ther cost of captal also var wth each other due to the dfferet ature of each of these sources I order to determe the corporate cost of captal, frst the cost of each of the compoets of captal should be depedetl calculated ad obtaed based o ther rato the total average captal structure of corporate captal cost 767

4 Esmaeelzadeh et al, Dfferet models have bee troduced the facal lterature ad used the facal marets order to calculate the cost of commo stoc Each of these models have the effectveess eeded for estmatg the cost of captal oe or more specfc maret a perod of tme; ad ther effcec s reduced ad replaced wth each other over tme These models are: Average Realzed Returs Model Adusted Average Realzed Returs Model 3 Captal Assets Prcg Model 4 Accoutg Base Assessmet Model 5 Tobs q Model 6 Dvded Growth Model - Average Realzed Returs Model: Accordg to ths model the vestors epectato of ther vestmets the commo stoc s equal to the same retur whch the have obtaed the past perod(s) - Adusted Average Realzed Returs Model: ths model s the Realzed Returs Model whch s adusted for the dvded growth ad profts Accordg to ths model, the commo stocholders epected retur s affected b two other varables cludg the growth rate of future profts ad the percetage of dvded terest 3 - Captal Assets Prcg Model: CAPM Model dcates that the epected retur of commo stoc (or cost of captal) s equal to the rs-free rate of stoc retur plus a rs that shareholders demad because of assumg a certa level of rs 4 - Accoutg Base Assessmet Model: Ths model s ow the EBO whch the share prce s defed as a fucto of boo value ad curret value of future uepected eargs; ad the dscout rate used ths model s the cost of captal 5 - Tobs q Model: Ths model s based o ths fact that there s a drect relatoshp betwee the corporate cost of captal ad the rate of q Accordg to ths model, each compa wll have the tedec to ew vestmet ol whe the maret value eceeds a ew captal ut per spet cost order to facg t 6 - Dvded Growth Model: Importat ssue ths model s measurg the growth rate of dvdeds accordg to the vestors belef; ad all efforts should be accordg to ths fact that the epected growth rate s estmated accuratel Whe ths rate s calculated accuratel, the cost of commo stoc wll easl be calculated, ad t s epected that the past process of eargs per share, whch s useful predctg the epected future growth, ca be used as the growth varable Model Assumptos Assumptos were dvded to two parts ths stud The frst part s a assumpto whch s related to the dffereces calculated cost of captal varous models Sometmes a compa or a dustr, dfferet models of calculatg the cost of captal lead to the farl smlar values, but ma cases the fal result of these models provde dfferet results Therefore, the relatoshp betwee the results of these models the specfc ecoomc, poltcal, ad socal codtos of Ira, ad the sgfcat dfferece betwee ther results are studed Therefore, the hpothess whch has bee the obect of desre for ths purpose s as follows H: There s o sgfcat relatoshp betwee the calculated rates of captal costs dfferet models H: There s a sgfcat relatoshp betwee the rates of captal costs dfferet models Studed Varables Idetfcato ad defto of varables ad calculatg ther accurate ad precse fluece have determg effects o the results of research, so the must be carefull defed ad measured, although the varables of ths research deped o other varables whch calculatg ad reportg them are out of researchers cotrol Captal cost, as the depedet varable, has a specal posto ths research ad s the ma as If ths parameter s ot carefull calculated, the accurac calculatg the depedet varables wll have o results I ths stud, the cost of equt captal s calculated ad put to the test usg the fve models Sze of compa s oe of the depedet varables used ths stud I order to determe the sze of compa, the weghted average of boo value of assets, maret value of et assets ad et sales prce are used for each of these compoets equall Statstcal Populato Statstcal Populato s a set of elemets whch have oe or more commo features, ad the elemet meas a perso or obect about who/whch the measuremet s doe Sce the compaes lsted Tehra Stoc Echage have commo features, formato about them s accessble, ad ther formato s relatvel accurate, the have bee cosdered ths stud Commo features these compaes are: The are Publc Jot Stoc; the have a good accoutg sstem, ther shares have the ames, the were proftable last two perods, ther proftablt s foreseeable the future, ad the have passed at least two ears of operato 768

5 J Basc Appl Sc Res, (3)765-77, Accordg to these commo features, compaes lsted Tehra Stoc Echage have bee cosdered as the statstcal populato Statstcal Sample Scetfc research ams to dscover commo prcples whch are true all cases, but to stud all elemets of socet for ths purpose, f ot mpossble, at least s ot ecoomcall feasble, so the samplg s used Sample s a smaller group of socet whch s selected for observato ad aalss; ad f ths sample s selected carefull ad scetfcall, ts results ca be geeralzed to the whole commut Statstcal methods The mult-varable regresso model s used order to test the research hpotheses I ths model, the cost of captal s cosdered as the depedet varable, ad the sze of compa, debt rato, level of dsclosure, ad tpe of dustr are cosdered as the depedet varables I geeral, the "multple lear regresso model" was as follows: frst, the method for estmatg the parameters t, the total sgfcace test of model, the total sgfcace test of coeffcets, cofdece tervals for regresso coeffcets, ad other maor parameters the "multple regresso" are eplaed, ad the the "multple regresso model" s troduced le wth ths stud partcular Model troducto If the respose varable () s related to the depedet (predctve) varable, the regresso model, whch s ow as the "multple regresso model", s defed as follows: =,,, (),, I whch s the *th respose, ad, are the values of depedet varables whch are assumed to be fed ad clear,,, are the parameters of model, ad the s are the compoets of error of model whch s assumed to be dstrbuted depedetl, ormal, wth mea zero, ad costatl Estmatg the parameters of model (regresso coeffcets) I order to estmate the parameters of multple Regresso model troduced above, we use the method of least squares I ths regard, we assume that the compoets of error model of s s ot correlated, wth mea var zero ad has costat varace We rewrte Model () as follows: ;,,, () Because the mmzato the method of least squares s doe based o the total square of errors, the fucto of least square s defed as follows:,,, S (3) The fucto S should be mmzed accordg to the parameters,,, The estmators of least squares must be true the followg codtos about the parameters of model (,,, ): S,,, K (4) S Ad,,, K (5) The reveted ad epaded relatos 4 ad 5, whch are ow as the ormal equatos, are as follows ad the calculate the estmato for each of the coeffcets: 769

6 Esmaeelzadeh et al, (6) B calculatg the above equatos, ach of the regresso coeffcets wll be calculated ad estmated Note: It s usuall preferred the multple regresso that the equatos to be dsplaed the matr otato O ths bass, the equato () ca be epressed the matr otato as follows: I whch ad ad Ad I the matr otato, whe we estmate a wa that the least square fucto s mmzed as follows, the coeffcets are estmated as follows: S (7) The matr least squares of regresso coeffcets ** are estmated the matr otato as follows: (Normal equatos the matr otato): S (8) Ths estmate s provded eve f ests, ad t s possble ust whe the depedet varables are learl depedet, t meas that oe of the colums of matr s a lear combato of others The multvarate regresso fucto regresso s estmated the matr otato as follows b calculatg the regresso coeffcets usg the above method: Overall sgfcace test of model Usg ths test, t s evaluated that whether there s a lear relatoshp betwee ad the depedet varables the model or ot I the other words, the followg assumptos are tested: At least for oe 77

7 J Basc Appl Sc Res, (3)765-77, B reectg the hpothess zero ths test, t wll become obvous that the respose varable has at least a sgfcat lear relatoshp wth oe of the depedet varables For ths test, the statstc F s used as follows: I a regresso model, the square of total varato avalable the observato of SS ca be separated to two compoets, the frst part dcates the porto of regresso model eplag ths varablt (SSR), ad the secod part caot be epressed b the regresso le ad s related to the remag data (errors) of model (SSE) Each of the squares, whch are metoed above, s defed as follows: ) ) SS SSR SSE 3) Because to the F statstc s defed as a rato the ch-square statstc whch s dvded to the degrees of freedom, the ch-square statstcs obtaed from the sum of square errors ad the sum of regresso squares are as follows: SSR ~ The rato of SSR to (Number of parameters) s dstrbuted as wth degree of freedom: K The rato of SSE to -- (degree of freedom related to the SSE) s dstrbuted as wth -- degrees of SSE ~ freedom: Thus, the test statstc s defed as follows: SSR MSR F K ~ F, SSE MSE (9) I fact, the sgfcace test of regresso model the aalss of varace process s performed accordg to the followg table: Total square of Chages Total square of compoets Degrees of freedom Mea square of the model compoets the model Regresso SSR K MSR Remaed data (errors) SSE -- MSE Total SS - F MSR MSE Wheever the value of statstc the test, whch s calculated based o the data, s greater tha ts crtcal value whch s etracted from ts table, the hpothess zero, tested b t, wll be reected Whe the hpothess zero s reected ths test, the adequac of our model s cofrmed; the other words, there s a relatoshp betwee the depedet varable ad at least oe of the depedet varables Therefore, order to vestgate that whch oe of varables s related to the depedet varable, the regresso coeffcets testg should be doe Cocluso Decso mag ad choosg the optmal strateges about the fud vestg ad the captal structure are the ma topcs the facal lterature for creasg the overall value of ecoomc ut I ths regard, the subect of facg s cosdered geeral, ad the cost of captal s cosdered partcular Moreover, ths research vestgates these two ssues deepl For ths purpose, the requred formato ad data are etracted from the facal statemets of compaes lsted Tehra Stoc Echage ad the statstcal populato of about 9 elgble compaes s chose usg a classfcato samplg method I order to aalze the data, frst the cost of captal s calculated b the fve models troduced the stud, ad the the dfferece the calculated cost of captal the varous models have bee tested ad ther sgfcace have bee prove The, the valdt of each of the models s tested ad the models are rated based o the valdt rate After determg the valdt of these 77

8 Esmaeelzadeh et al, models, the factors affectg the cost of captal each of the models are put to the test Fall, the evaluatg accoutg model has bee troduced as the most relable model for calculatg the cost of captal, ad the tpe of dustr ad sze of compa have bee detfed as factors affectg the cost of captal REFERENCES - Aleader, Barges The effect of captal structure o the cost of captal Eglewood Clffs, NJ Pretce Hall, Ic, 963, PP Baz, RW( 98) The Relatoshp betwee Retur ad Maret Value of Commo Stocs, Joural of Facal Ecoomcs, 9 (March), pp Barges A, The Effect Of Captal Structure O The Cost OF Captal Eglewood Clffs N Pretce HallIc Bater, Nevs D Leverage, Rs of Ru ad The Cost of Captal Joural Of face, Vol, sep Beaver, W H, Lambert, R, ad Morse, D (98) The Iformato Cotet of Securt Prces, Joural of Accoutg Ad Ecoomcs, (), pp Be horm, M, Ad Calle, J l, (989) The Cost of Captal, Macuala s Durato, Ad Tob s q, Joural of Facal Research, (),pp Board, JLG, ad Waler, M, (99) Capsules ad Commets; Iter-temporal ad Cross Sectoal Varato the Assocato betwee Uepected Accoutg Rates of Retur ad Abormal Returs Joural of Accoutg Research, 8 (), pp Booth, L (98) Maret Structure Ucertat ad the Cost of Equt Captal, Joural of Bag ad Face, pp Botosa, CA 997 Dsclosure level ad the cost of equt captal The Accoutg Revew (Jul): Botoso, ad M Plumlee, A Re-eamato of Dsclosure level ad The Epected cost of Equt Captal Worg paper, Uverst of Utah, Salt Lae Ct, UT - Brgham, E E, Shome, DK, ad Vso, S R (985) The Rs Premum Approach to Measurg A Utltes Cost of Equt, Facal Maagemet,4(), pp