Management Science Letters (Oct 2012)

A study on effects of cost-of-equity models on cost-of-capital and capital structure

  • Meysam Arabzadeh

Journal volume & issue
Vol. 2, no. 6
pp. 1855 – 1864


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Most financial managers believe that there are different factors hindering decision-making about the capital structure of a company. This hindrance is so that, in some financial management literatures capital structure is called the mystery of capital. Financial managers widely believe that financial leverage enjoys a noticeable status in managerial decision making as well as management of the framework of balance sheet. The primary purpose of this research is to present applications of equity modules and to study effective factors on such models on Tehran stock exchange. The study covers data over a period of five years from 2001 to 2005. The study analyzes and tests relevant data to firm’s debt ratio and corporate size as effective factors on cost-of-equity. The preliminary findings indicate that contrary to the commonly held belief in financial management theorems, debts ratio has the least effect on cost-of-equity. Nevertheless, the study suggests that the variant of company’s size has a meaningful relationship with cost-of-equity. To calculate cost-of-equity, CAPM, Gordon and return ratio methods are used. Findings show that CAPM has more validity compared with other varieties. On the other hand, the results indicate that there is a 95-percent probability proving that liquidity has a significant negative effect on financial leverage.