Determining the Cost of Equity in the Developing Stock Market of Bulgaria: Up-To-Date Approaches and Methods
Determining the Cost of Equity in the Developing Stock Market of Bulgaria: Up-To-Date Approaches and Methods

Author(s): Dimiter Nenkov, Diyana Miteva
Subject(s): Economy, Business Economy / Management, Financial Markets, Socio-Economic Research
Published by: Университет за национално и световно стопанство (УНСС)
Keywords: cost of equity; risk-free rate; market risk premium; capital asset pricing model (CAPM)
Summary/Abstract: This research is focused on one of the most problematic and debatable aspects of financial management – the estimation of the cost of equity capital on the developing stock market of Bulgaria. Each of the available methods has its own serious disadvantages and limitations, which casts doubt on the reliability and validity of the determined cost of equity. At this stage, no method has yet been proven to derive a cost of equity with sufficient certainty to achieve consensus among analysts, managers, investors and academics. This paper explores briefly the disadvantages and limitations of each of the methods, especially in the context of their use at emerging capital markets. The possibilities for finding a solution are sought mainly in improving the application of the Capital Asset Pricing Model (CAPM), as the most widely used in practice. The open issues, related to each of the input variables of the model are analyzed, with focus on the equity risk premium (ERM), mainly from the perspective of emerging and developing stock markets. At the end, a combined approach for determining the cost of equity at the Bulgarian stock market is discussed and proposed.

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