engleski

Problems of estimating the cost of capital in emerging markets

The process of calculating the cost of capital represents important information for every company that is planning some kind of investment in tangible assets. It forms a part of the process of capital budgeting, and the rate calculated as the weighted average cost of capital is used as the discount rate to discount the predictable cash flows of the investment project, or as a limit on project eligibility in accordance with the rules of financial decision making. Complex process of determining the cost of capital greatly increases in the case of companies operating in emerging markets. Such markets have proven to be inefficient, which is the basic assumption of the Capital Assets Pricing Model used in determining the cost of capital. On inefficient markets applicability of traditional method of calculating the cost of capital is questionable, and the problem of common methodology adjustments according to circumstances in such emerging markets arise. The aim of this paper is to point out the necessity of adapting the methodology and give some suggestions in this regard through the usage of Behavioral Asset Pricing Model (BAPM). The resulting conclusions can also be used in the process of capital budgeting in small and medium-sized enterprises, as well as on those companies that are not quoted on the stock exchange.

Emerging markets; cost of capital; project investment decisions; BAPM

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