DETERMINING THE COST OF EQUITY IN THE CONDITIONS OF CRISIS

Abstract

Changes on financial markets caused by subprime crisis in the United States andrelated problems in the real sphere of many European economies have initiated adiscussion on the factors of business value, also in the area of methods of determiningthe cost of equity. Known and commonly used, especially on poorly developedmarkets, methods in the period of a traditional business cycle required manyadjustments. This situation could have caused increase in the role of subjective factorsin business valuation. The article, apart from known methods, presents a new conceptof determining the cost of equity, adequate to the present turbulent market conditions.It allows determining more precisely the cost of equity of companies operating in theconditions of unstable economies. In these economies the use of known methods ofcalculating the cost of equity is either impossible or requires the application of manyadjustments that often do not guarantee correct result. An advantage of the presentedmethod over other models (even Bond Yield Plus) is that risk premium, related toinvestments in equity, is determined in a manner preventing discretional adoption ofits amount. The previous practice indicates that often the amount of this premium wasdetermined at a level expected by the customers. The proposed method limits impactof subjective factors on business value, which often distort the actual business value.