Fundamentals-Based Cost of Capital Measurement and Comparison with Benchmark Models

Abstract

Risk and return in is counted as one of the main tools in Finance literature which at the end will be presented as cost of capital. Cost of capital has a direct and important role in investment and finance decisions and always has been the main challenge for investors and finance decision makers. In this research we have tried to measure the cost of capital based on fundamental model and to compare it with employed cost of capital and Fama&French models. The result of investigation which was taken in 2011 among more than 88 TSE firms indicated that accounting based cost of capital in relation to financial variables has more correlation in compare with Fama&French and CAPM.As to this matter cost of capital can be a better help to users in evaluating and decision makings.

Keywords

• Accounting-based risk measures
• Cost of capital
• Excess return on equities Beta
• Capital Asset Pricing Model
• Fama and French model