| The cost of capital literature identifies various risk factors as determinants of investor's required return. Previous studies are found in the literature which examine some of these risk factors. The present study undertakes a comprehensive cross-sectional approach to investigating all of the identified factors in concert. Using a sample of 67 electric utilities, eight cost of capital (k) indicators are constructed including: discounted cash flow (DCF) k, weighted average cost of capital using DCF and using the Capital Asset Pricing Model (CAPM), dividend yield, return on equity, beta, one year holding period return and market-to-book ratio. The present study does not evaluate individual cost of capital approaches for their reliability in measuring the true cost of capital. However, empirical results are compared across the various cost of capital measures which lends robustness to the conclusions.;Fifteen risk factors are evaluated for their importance in explaining each sample company's cost of capital as measured by the various indicators. The experimental design thus allows empirical conclusions in important areas such as dividend policy, regulatory climate, individual firm operating characteristics and corporate capital structure. Empirical results are evaluated for their statistical strength. In addition, the observed results are discussed in light of classical finance theory prescriptions. |
