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Implied Cost of Capital over the Last 20 Years

Author

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  • Norio Kitagawa

    (Graduate School of Business Administration, Kobe University, Japan)

  • Masatoshi Gotoh

    (Graduate School of Business Administration, Kobe University, Japan)

Abstract

The purpose of this paper is to estimate an alternative implied cost of capital, as inferred from a valuation model, and to attempt to compare its validity. We compare the following major five models: 1) a model proposed by Gebhardt et al. (2001); 2) a model suggested by Ohlson and Juettner-Nauroth (2005); 3) an expected earnings to price ratio (EP ratio); 4) a PEG ratio; and 5) a modified PEG ratio (the last two being proposed by Easton (2004)). For the criteria of valuation in this study, we focused on the following two points: first, a signifi cant correlation with the risk factors consistent with the expected signs and, second, that the coefficients have the expected sign and that the adjusted R-square is high in the multivariate models that regress the cost of capital on the risk factors. As a result, we conclude that the PEG and modifi ed PEG ratios are superior to other models. Furthermore, we suggest that the correlation between the cost of capital and the risk factors varies, depending on the periods. Although Gode and Mohanram (2003) pointed out that the difference in the cost of capital by industry is important, this study shows that the difference in the time series of the cost of capital is more important in Japan.

Suggested Citation

  • Norio Kitagawa & Masatoshi Gotoh, 2011. "Implied Cost of Capital over the Last 20 Years," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 1, pages 71-104, December.
    • Handle: RePEc:kob:tjrevi:dec2011:v:1:p:71-104
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    References listed on IDEAS

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    1. Echterling, F. & Eierle, B. & Ketterer, S., 2015. "A review of the literature on methods of computing the implied cost of capital," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 235-252.

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    More about this item

    Keywords

    Implied Cost of Capital; PEG ratio; Modified PEG Ratio; Risk Factors;
    All these keywords.

    JEL classification:

    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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