Estimating the Cost of Equity Challenges and Potential Solutions

Estimating the cost of equity is continuing to be a sensitive subject and to raise controversial opinions. This matter is understandable due to the high sensitivity that the weighted average cost of capital has in the estimation of the fair value of a business. On the other hand, the calculation itself of the rate of return that would determine an investor to undertake an investment in an average risk profile company, represent an important research subject. The presented analysis aims to review major challenges to which a compelling assessment of the cost of equity must respond. Solutions are also proposed to reach the most reasonable compromises, taking into account the sensitive aspects that have to be managed. Approaches proposed considered the instruments that can be reached within a valuation process. The examples illustrate, in local currency and euro, the calculation of the risk - free risk rate, the equity risk premium and finally of the cost of equity and also the use of a conversion instrument of discount rates from euro to local currency. Described calculation exercises refer not only to a company that operates in Romania, but also to other countries from Central and Eastern Europe. In other words, one of the goals was to offer a broad perspective of the subject through a regional approach. Thus, understanding of reasoning is much easier, because comparisons concerning investor's expectations from one market or another can be made.