The Determinants of the Cost of Capital by Industry within an Emerging Economy: Evidence from Egypt

Abstract

Although many studies have been undertaken on the cost of capital, insufficient attention has been paid to the factors that drive the cost of capital in the emerging markets, in particular the Middle East region. Here, an analysis is undertaken of the cost of capital in Egypt, based on a sample of 119 companies. A number of models are used to measure the cost of equity and in turn the overall cost of capital, which is calculated on the basis of both book and market values. Broadly speaking the cost of equity is around 12.5 per cent and the overall cost of capital roughly around 12 per cent. Step-wise multiple regressions are used to find the underlying determinants. Generally, growth and size are particularly important. Also, for actively traded companies and for heavy industries, in particular, financial and business risks are significant factors. For the contracting and real estate sector, which has a higher cost of capital, fixed asset backing is another key variable. In the food sector, liquidity is one of the important determinants. Finally, a satisfactory model was not found to explain the cost of capital in the service sector.

Keywords: Cost of capital, equity, debt, leverage, stock market, Egypt

JEL Classification: G35, N25