ESTIMATION OF COST OF CAPITAL IN EMERGING MARKETS: THE CASE OF ESTONIA

Abstract

This paper analyzes the practice of the cost of capital estimation by Estonian financial analysts based on the survey conducted by authors. The cost of capital is an important input in many financial models, especially when dealing with business valuation, optimizing company’s capital structure, and others. In spite of numerous studies on the issue and quite a period of cost of capital estimation, which is over ten years, Estonian analysts are faced with difficulties of finding appropriate inputs to estimate the cost of capital for Estonian companies. We find that the practice of cost of capital estimation is rather diverse albeit there are common approaches used. The primary approach to estimate the cost of equity is capital asset pricing model (CAPM), whereas there is no prevalent approach to estimate the cost of debt. Majority of analysts account for the country risk, the practice of accounting for other risks is scattered. Finally, we notice emergence of new approaches to cost of capital estimation.

DOI: http://dx.doi.org/10.5755/j01.em.17.1.2254