Estimating the Cost of Equity and Equity Risk-Premia of Canadian Firms

Athanassakos, George

Volume 1, Number 3 / September , Pages 169-254

Multinational Finance Journal, 1997, vol. 1, no. 3, pp. 229-254

George Athanassakos , Wilfrid Laurier University, Canada Corresponding Author

Abstract:
This article proposes an alternative approach to estimating the required rate of return on equity, combining the bond-plus risk-premium approach and the Capital Asset Pricing Model, and tests it using Canadian data. Individual stock risk-premia are classified into groups according to the point in the business cycle, risk based on each company’s bond rating, and industry groups as defined by industry classification. Group averages are calculated. We find equity risk-premia are negatively related to interest rates and bond ratings. Moreover, the higher the risk of an industry group, the higher are the equity risk-premia. However, findings regarding the risk-premia’s sensitivity to the business cycle and stability across business cycles are not very conclusive

Keywords : equity risk-premia; cost of equity; CAPM; bond-plus riskpremium
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