A Financial Profile of Those Firms with the Lowest Cost of Equity Funds and a Canonical Ranking of the Risk-Return Factors

Bruce C. Payne, Adnan Daghestani, Samuel Doss, Roman Wong

Abstract


The estimation of the overall weighted average cost of capital for any firm is of paramount importance, and for good reason. An estimate that is too high can result in a firm turning down projects that it should have accepted. An estimate that is too low can result in accepting projects that should have been rejected. The cost of using borrowed funds, and the cost of using preferred stock, if it is cumulative, can be observed, but the cost of using both internal and external equity funds must be estimated. The present study is concerned with that estimate and the risk-return variables that affect that estimate. A financial profile is established for those firms that have very low costs of equity funds. As in previous studies of this nature, multiple discriminant analysis is used, and the variables that affect the cost of using equity funds are ranked canonically.

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