Estimation of the Costs of Capital in Social Economy Enterprises
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This study estimates the costs of equity, the cost of debt, and the weighted average costs of capital (WACC) of social economy enterprises, which are important for sustainable development. This study estimates the systematic risk of enterprises using fundamental betas, which utilize the relation between the systematic risk and financial variables of listed companies. As a result, the average of their estimated betas is 1.79, which means that their systematic risk is 1.79 times higher than the market portfolio because the enterprises have higher financial leverage, growth rate, earnings variability, and smaller firm size. Their costs of equity, those of debt, and WACC are 11.54%, 3.14%, and 7.67% respectively. The implications are that their costs of capital can be employed as social investment criteria reflecting their risk and can be used as tools to evaluate if social economy enterprises achieve the expected social performance or social values.
Abstract
This study estimates the costs of equity, the cost of debt, and the weighted average costs of capital (WACC) of social economy enterprises, which are important for sustainable development. This study estimates the systematic risk of enterprises using fundamental betas, which utilize the relation between the systematic risk and financial variables of listed companies. As a result, the average of their estimated betas is 1.79, which means that their systematic risk is 1.79 times higher than the market portfolio because the enterprises have higher financial leverage, growth rate, earnings variability, and smaller firm size. Their costs of equity, those of debt, and WACC are 11.54%, 3.14%, and 7.67% respectively. The implications are that their costs of capital can be employed as social investment criteria reflecting their risk and can be used as tools to evaluate if social economy enterprises achieve the expected social performance or social values.
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