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Implementation of Capm, Fama-French Three-Factor, and Five-Factor in Indonesia Stock Exchange and Cement Industry Sector

Author

Listed:
  • Dewa Nyoman Wiryasantika Wedagama

    (School of Business, Bogor Agricultural University, Bogor Indonesia.)

  • Dedi Budiman Hakim

    (Department of Economics, Bogor Agricultural University, Bogor, Indonesia)

  • Bambang Juanda

    (Department of Economics, Bogor Agricultural University, Bogor, Indonesia)

  • Trias Andati

    (School of Business, Bogor Agricultural University, Bogor, Indonesia)

Abstract

Weighting Average Cost of Capital (WACC) plays a critical role as a discounting factor of the corporate valuation process's estimated future free cash flow by highly influencing the valuation process. It consists of three components, namely cost of debt, cost of equity, and proportion of capital structure. Costs of debt and capital structure are easily calculated due to data stability and less volatility. Meanwhile, the cost of equity is difficult to determine due to assumption, the period taken, the method applied, and complexity. Many assets pricing methods are used to determine the required rate of return in equity, namely CAPM, Fama French Three-Factor (FF3F), and Fama French Five-Factor (FF5F). These three asset pricing models are used to determine the models with strong explanatory factors on equity return to portfolios developed from sorting FF5F factors and individual equity of four cement companies publicly listed in the Indonesia Stock Exchange (IDX).

Suggested Citation

  • Dewa Nyoman Wiryasantika Wedagama & Dedi Budiman Hakim & Bambang Juanda & Trias Andati, 2022. "Implementation of Capm, Fama-French Three-Factor, and Five-Factor in Indonesia Stock Exchange and Cement Industry Sector," International Journal of Economics and Financial Issues, Econjournals, vol. 12(2), pages 52-60, March.
    • Handle: RePEc:eco:journ1:2022-02-5
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    References listed on IDEAS

    as
    1. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    2. Ferikawita M. Sembiring, 2018. "Three-Factor and Five-Factor Models: Implementation of Fama and French Model on Market Overreaction Conditions," GATR Journals jfbr150, Global Academy of Training and Research (GATR) Enterprise.
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    4. Wenting Jiao & Jean-Jacques Lilti, 2017. "Whether profitability and investment factors have additional explanatory power comparing with Fama-French Three-Factor Model: empirical evidence on Chinese A-share stock market," China Finance and Economic Review, Springer, vol. 5(1), pages 1-19, December.
    5. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Valuation; WACC; Cost of equity; CAPM; Fama-French Three Factors; Fama-French Five Factors;
    All these keywords.

    JEL classification:

    • D46 - Microeconomics - - Market Structure, Pricing, and Design - - - Value Theory
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets

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