Research On Comparison Of Cost Of Equity Capital Estimating Model And Reasonable Boundaries

The cost of equity capital estimation is the key and difficult problem in the development of modern financial theory. The reasonable boundaries of cost of equity capital are one of the newest developments of estimating the cost of equity capital. The reasonable range of the cost of equity capital determined by reasonable boundaries is the important basic data of the securities market. Sifting the models of estimating the cost of equity capital is the threshold to establish reasonable boundaries.Through a review of the early literature, the paper makes up for the gaps of the early literature review of the cost of capital. Research on the cost of capital theory is divided into two stages, one is the early stage, the stage is subdivided into (1)(before1950) the embryonic stage of the concept of cost of capital,and(2)(from1950to1958) the analysis stage of concept and estimation method of the cost of capital. The two is the development stage of researching on the cost of capital. This stage has continued since1958, research on the cost of capital nature, estimating Method of the cost of capital and empirical analysis of the factors affecting the cost of capital has great development. In theory and in practice, research on the reasonable boundaries of cost of equity capital is proposed.According to comparative analysis of15estimating model belonging to the risk compensation method and internal rate of return method, the paper selects three kinds of main models, estimates cost of equity capital of enterprises in China. Three kinds of main models is CAPM, GLS and OJ model. The paper estimates the cost of equity capital using the financial date for21387firm-year observations over the period2006-2011of A-share listed companies in Shanghai and Shenzhen Stock Exchange. The results show that different estimating models, in the same year and the same capital market, lead to differences in the estimating results. Model selection has great influence on estimation of the cost of equity capital. Among three models, the OJ model and GLS model have similar trend.GLS model results are overall on the low side, the overall data is lower than OJ model data. The formation of this difference is due to the different forecast results for future growth of two models. The estimation result is between6.19%and11.26%, which can be used as the reference data for the recent cost of equity capital.After Literature review and estimation technique selected, the paper puts forward the initial idea of reasonable boundaries of the cost of equity capital. Learn from the idea of boundary of the interest rate, the interest rate is regarded as the lower limit of the reasonable boundaries. The methods for determination of the upper limit is more, one method is to use the selected or recognized one to three main estimation technology and get a relatively stable equity capital cost estimation data over a enough long time for a deadline. Or the actual rate of return deducted interest rates is regarded as the upper limit of equity capital cost. Thus the upper limit and lower limit form reasonable boundaries of the cost of equity capital.