RESEARCH OF THE RELATIONSHIP BETWEEN THE WEIGHTED AVERAGE COST OF CAPITAL AND SELECTED PROFITABILITY RATIOS OF COMPANIES IN THE REPUBLIC OF SERBIA
Keywords:
WACC, cost of equity, CAPM, cost of long term debt, ROA, ROE, net profit margin, discount rate
Abstract
The weighted average cost of capital (WACC) is determined as the weighted
average cost of capital of all long-term sources of corporate financing. WACC is used
as a discount rate when determining the value of a company, then in investment analysis
when making a decision to accept/reject a project, as well as when evaluating the
performance of top management. The paper calculates the WACC for all non-financial
corporations that make up the basket of the Belex15 index and then examines the
relationship between the weighted average cost of capital and the profitability ratios
numbers ROA, ROE and net profit margin. The research results show that the WACC
ranges between 3.45% and 17.77% for the sample companies. Also, the results show a
negative correlation between WACC on one and selected profitability ratios on the
other hand. However, it should be noted that this relationship is statistically significant
only between WACC and net profit margin.
References
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Partridge, I. (2018). Cost comparisons for wind and thermal power generation. Energy Policy, 112(January): 272-279.
Sharpe, W. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Condition of Risk. Journal of Finance, 19(3). 425-442.
Smith, T., & Walsh, K. (2013). Why the CAPM is Halp-Right and Everything Else is Wrong. ABACUS, 49(S1): 73-78.
Syed, W. H., Ghayanfar, A., & Zia, U. I. (2012). Impact of WACC on Corporate Profitability. Impact of Risk and Diversification, 4: 1-7.
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Treynor. J. L. (1962). Toward a Theory of Market Value of Risky Assets. Unpublished paper. Final version of the paper is published in the book Korajczyk, R. (1999). Asset Pricing and Portfolio Performance. London: Risk Books. pp. 15-22.
Van Horne, J. C., & Wachowicz, J. M. (2009). Fundamentals of Financial Management (13th Ed.). Harlow: Pearson Education Ltd.
Bekaert, G., & Harvey, C. R. (2014). Emerging Equity Markets in a Globalizing World. SSRN Working Paper No. 2344817.
Beogradska berza. www.belex.rs.
Benson, K., & Faff, R. (2013). β. ABACUS. 49(S1): 24-31.
Brealey, R. A., Stewart, C. M., & Allen, F. (2011). Principles of Corporate Finance. New York: McGraw-Hill Irvin.
Brooks, C. (2014). Introductory Econometric for Fnance. Cambridge: Cambridge University Press.
Brotheron, W. T., Eades, K. M., Harris, R. S., & Higgins, R. C. (2013). “Best Practices” in Estimating the Cost of Capital: An update. Journal of Applied Finance, 1. 1-19.
Bruner, R. F., Eades, K. M., Harris, R. S., & Higgins, R. C. (1998). Best Practices in Estimating the Cost of Capital: Survey and Synthesis. Financial Practice and Education, 27(1). 13-28.
Chen, N. F., Roll, R., & Ross, S. A. (1986). Economic Forces and the Stock Market. Journal of Business, 59(3): 383-403.
CFA Institute (2020). Corporate Finance and Equity. Level I, Volume 4. New Yersey: Wiley Global Finance.
Da, Z., Guo, R. J., & Jagannathan, R. (2012). CAPM for Estimating Cost of Equity Capital: Interpreting the Empirical Evidence. Journal of Financial Economics, 103(1): 204-220.
Damodaran, A. Damodaran Online, http://people.stern.nyu.edu/adamodar (data updated 01.01.2021).
Damodaran, A. (2009). Volatility Rules: Valuing Emerging Companies. (Taken from https://pages.stern.nyu.edu/~adamodar/pdfiles/papers/emergmkts.pdf, accessed on 01.07.2021).
Damodaran, A. (2015). Applied Corporate Finance (4th Ed.). Hoboken, NJ: John Wiley & Sons Inc.
Dempsey, M. (2013). The Capital Asset Pricing Model (CAPM): The History of a Failed Revolutionary Idea in Finance? ABACUS, 49(S): 7-23.
European Central Bank. Statistical Data Warehouse. http://sdw.ecb.europa.eu.
Estrada, J. (2007). Mean-Semivariance Behavior: Downside Risk and Capital Asset Pricing. International Review of Economics and Finance, 16(2): 169–185.
Fama, E. F., & French, K. R. (1992). Cross-Section of Expected Returns. Journal of Finance, 47(2): 427-466.
Fama, E. F., & French, K. R. (1993). Common Risk Factors in the Returns on the Stocks and Bonds. Journal of Financial Economics, 33(1): 3-56.
Fama, E. F., & French, K. R. (2015). A Five-Factor Asset Pricing Model. Journal of Financial Economics, 116(1): 1-22.
Jacobs, M. T., & Shivdasani, A. (2012). Do You Know Your Cost of Capital? Harvard Business Review, 90(7/8). 118-124.
Kayo, E. K., Martelance, R., Brunaldi, E. O., & da Silva, E. (2020). Capital Asset Pricing Model. Beta Stability. and the Pricing Puzzle of Electricity Transmission in Brazil. Energy Policy, 142(July): 1-8.
Kočović, J., Paunović, M., & Jovović, M. (2016). Determining the Discount Rate: The Case of Oil Industry in Serbia. Ekonomika preduzeća, 64(5-6). 371-381.
Lintner, J. (1965). The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budget. Review of Economics and Statistics, 47(1): 13-37.
Liu, E. (2006). A Liquidity-Augmented Capital Asset Pricing Model. Journal of Financial Economics, 82(3): 631-671.
Momcilovic, M., Vlaovic Begovic, S., & Zivkov, D. (2015). Cost of Equity: The Case of Serbian Food Industry. Custos e @gronegócioon line, 11(1): 184-197.
Momcilovic, M., Zivkov, D. & Vlaovic Begovic, S. (2017). The Downside Risk Approach to Cost of Equity Determination for Slovenian, Croatian and Serbian Capital Markets. E+M Ekonomie a Management, 20(3): 147-158.
Momčilović., M. & Vlaović Begović, S. (2020). The Relationship between Weighted Average Cost of Capital and Profitability of Companies in Sebia: Case Study. In: Damnjanović. J. & Stankov. B. (edit.). Second Biennial International Scientific and Expert Conference Economic development and copetitiveness of European countries: Challenges of economic integration (98-102). Novi Sad: Novi Sad School of Business.
Mossin, J. (1966). Equilibrium in a Capital Asset Market. Econometrica, 34(4). 768-783.
Nel, W. S. (2011). The Application of the Capital Asset Pricing Model (CAPM): A South African Perspective. African Journal of Business Management, 5(13): 5336-5347.
Newey, W. K., & West, K. D. (1987). A Positive Semi-definite, Heteroskedasticity and Autocorrelation-consistent Covariance Matrix. Econometrica, 55 (3), 703–708.
Partington, G. (2013). Death Where is The Sting? A Response to Dempsey’s Dispatching of the CAPM. ABACUS, 49(S1): 69-72.
Partridge, I. (2018). Cost comparisons for wind and thermal power generation. Energy Policy, 112(January): 272-279.
Sharpe, W. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Condition of Risk. Journal of Finance, 19(3). 425-442.
Smith, T., & Walsh, K. (2013). Why the CAPM is Halp-Right and Everything Else is Wrong. ABACUS, 49(S1): 73-78.
Syed, W. H., Ghayanfar, A., & Zia, U. I. (2012). Impact of WACC on Corporate Profitability. Impact of Risk and Diversification, 4: 1-7.
Statistical Portal for Market Data. www.statista.com.
Treynor. J. L. (1962). Toward a Theory of Market Value of Risky Assets. Unpublished paper. Final version of the paper is published in the book Korajczyk, R. (1999). Asset Pricing and Portfolio Performance. London: Risk Books. pp. 15-22.
Van Horne, J. C., & Wachowicz, J. M. (2009). Fundamentals of Financial Management (13th Ed.). Harlow: Pearson Education Ltd.
Published
2022/05/17
Section
Original Scientific Paper
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