Český finanční a účetní časopis 2018(4):51-69 | DOI: 10.18267/j.cfuc.522

The dependence of the costs of borrowed interest-bearing capital on the chosen financial variables

Lucie Rudolfová

Vysoká škola ekonomická v Praze, Fakulta financí a účetnictví, katedra financí a oceňování podniku, nám. W. Churchilla 4, 130 67 Praha 3.

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.

Keywords: Costs of capital; Borrowed capital; Interest-bearing capital.

JEL classification: G32

Published: January 1, 2019  Show citation