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The dependence of the costs of borrowed interest-bearing capital on the chosen financial variables
[Závislost nákladů úročeného cizího kapitálu na vybraných finančních ukazatelích]

Author

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  • Lucie Rudolfová

Abstract

The article examines the dependence of the costs of borrowed capital on two financial variables (interest coverage and the total volume of interest-bearing borrowed capital). The aim is to evaluate the ability of these two variables to predict the costs of borrowed capital for the purpose of business valuation. Interest coverage as the first variable has been chosen as the main component of the interest coverage model suggested by A. Damodaran in 2006. This model is recommended in literature as one of the possible methods for the estimation of the costs of borrowed capital. This model is not based on the Czech data and that is the reason why I try to evaluate in what extent this variable is useful for the estimation of costs of borrowed capital in case of the Czech companies. The absolute value of interest bearing borrowed capital as a second variable has been chosen because it represents the approximation of the loan volume which as I expect bears lower interest rates in case of higher loan volumes. For the purpose of analysis the regression model was applied on the sample of 8 358 companies which were active in the period 2013 -2016 in Czech Republic. Weak indirect dependence was detected between the two observed variables and the costs of borrowed capital. It has also been proven that using a specific combination of these two variables the costs of borrowed capital can be estimated for 65% of companies in the sample with the deviation smaller than 1.5 percentage points.

Suggested Citation

  • Lucie Rudolfová, 2018. "The dependence of the costs of borrowed interest-bearing capital on the chosen financial variables [Závislost nákladů úročeného cizího kapitálu na vybraných finančních ukazatelích]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2018(4), pages 51-69.
    • Handle: RePEc:prg:jnlcfu:v:2018:y:2018:i:4:id:522:p:51-69
    DOI: 10.18267/j.cfuc.522
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    More about this item

    Keywords

    Costs of capital; Borrowed capital; Interest-bearing capital; Náklady kapitálu; Cizí kapitál; Úročený kapitál;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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