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How Capital Structure Affects Business Valuation: A Case Study of Slovakia

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  • Katarina Valaskova
  • George Lazaroiu
  • Judit Olah
  • Anna Siekelova
  • Barbora Lancova

Abstract

A company's capital structure is a significant factor in valuing its business. The relative levels of equity and debt affect risk and cash flow and, therefore, the amount an investor would be willing to pay for the company or an interest in it. Capital structure matters because it influences the cost of capital. Therefore, this paper aims to quantify the effect of the capital structure on the cost of capital of Slovak enterprises and to suggest an effective way of financial decision-making. The data used in the study was gained from the Bratislava Stock Exchange because publicly available information on enterprises issuing their shares on the stock exchange was needed to calculate the cost of capital. Due to the underdeveloped capital market of Slovakia, we chose 17 stock companies (except for commercial banks) operating on the Slovak market having all the data required. The financial data of companies were obtained from their financial statements spanning 2013 to 2017. The impact of the capital structure on the cost of capital was investigated by the Pearson correlation coefficient, regression analysis and Mann-Whitney U-test. The study found that there is an indirect relationship between the capital structure, the cost of capital and the size of the company. We also conclude that the growing volume of debt may result in a decline in the corporate costs of capital. These findings concerning Slovak enterprises incline to the respected compromise theory.

Suggested Citation

  • Katarina Valaskova & George Lazaroiu & Judit Olah & Anna Siekelova & Barbora Lancova, 2019. "How Capital Structure Affects Business Valuation: A Case Study of Slovakia," Central European Business Review, Prague University of Economics and Business, vol. 2019(3), pages 1-17.
    • Handle: RePEc:prg:jnlcbr:v:2019:y:2019:i:3:id:218:p:1-17
    DOI: 10.18267/j.cebr.218
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    2. Richard Yeaw Chong Seow, 2023. "Comparative Financial Performance and Firm Valuation Analysis: A Malaysian Logistics Service Provider Case Study," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 7(7), pages 594-613, July.

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    More about this item

    Keywords

    capital structure; cost of debt; cost of equity; cost of capital;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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