Quantification of Expected Return of Investment in Wood Processing Sectors in Slovakia
Abstract
:1. Introduction
- RQ 1: What are the values of the expected return on investment in the investigated sectors?
- RQ 2: Are there significant differences in the expected return on investment in the studied industries?
- RQ 3: What are the fundamental causes of the differences in the expected return on investment?
2. Literature Review
3. Materials and Methods
- The cost of debt capital rd means the interest rate that can be determined as a weighted average of the concluded loan and debt agreements;
- The cost of equity re was also determined based on the Modigliani–Miller theory (1958) [16], which is given by the formula:
- For the risk-free premium rf is usually used as the risk-free interest rate, which is determined, for example, from the US 10-year government bonds;
- Beta coefficient β determination is based on the fact that the debt of the company operates in the value of β;
- Risk premium (rm − rf) is determined for the concrete country of the region according to the rating credit of the rating agency (Standard and Poors’s or Moodys).
- Levered Beta → Inclusive of Capital Structure Effects (D/E Ratio);
- Unlevered Beta → Removed Capital Structure Effects (D/E Ratio).
- Beta = 1: Shares are just as risky as the market (no market sensitivity);
- Beta > 1: Shares are riskier than the market (high market sensitivity);
- Beta < 1: Shares are less risky than the market (low market sensitivity);
- Beta = 0: Shares have no correlation to the market (no market sensitivity).
4. Results and Discussion
5. Conclusions
- Lack of knowledge about methods of determining the required/expected rate of return on investments in wood-processing sectors in Slovakia;
- Absence/insufficient visibility of data on the necessary values for determining the required/expected rate of return on investments in forest-based sectors in Slovakia (value of risk premium, unlevered and levered beta, and the debt level of the sector).
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
References
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Region | Includes | Included Countries |
---|---|---|
United States | Just US | |
Europe | Western Europe and the UK (EU, UK, Switzerland, and Scandinavia) | Czech Republic, Croatia |
Japan | Just Japan | |
Emerging Markets | All of Asia, other than Japan, Latin America, Africa, the Middle East, Eastern Europe, and Russia, with a further breakdown for India and China | Slovakia, Slovenia |
Australia, New Zealand, and Canada | Australia, New Zealand, and Canada | |
Global | All firms |
Industry Sector | Number of Firms | Levered Beta | D/E Ratio | Tax Rate | Unlevered Beta |
---|---|---|---|---|---|
Furn/Home Furnishings | 250 | 1.16 | 15.23% | 15.23% | 1.05 |
Paper/Forest Products | 187 | 1.17 | 65.83% | 12.93% | 0.79 |
Total Market | 24,435 | 1.11 | 55.19% | 13.47% | 0.79 |
Total Market (without financials) | 21,977 | 1.13 | 33.31% | 13.33% | 0.91 |
Geometric Average Historical Return | S&P 500 | 10-Year US T. Bond | Risk Premium (US) | CDS (SVK) | Risk Premium (SVK) |
---|---|---|---|---|---|
(rm) | (rf) | (rm − rf) | (rm − rf) | ||
1928–2021 | 9.98% | 4.84% | 5.13% | 1.03% | 6.16% |
Indicator/Sector | Furniture/Home Furnishings | Paper/ Forest Products | |
---|---|---|---|
βu | Unlevered beta | 1.05 | 0.79 |
D/E | D/E Ratio | 15% | 65% |
t | Corporate tax rate | 21% | 21% |
βl | Levered beta | 1.17 | 1.20 |
Indicator/Sector | Furniture/Home Furnishings | Paper/ Forest Products | |
---|---|---|---|
rf (SVK) | Risk-free rate (SVK) | 1.529% | 1.529% |
βl | Beta coefficient | 1.17 | 1.20 |
(rm − rf) SVK | Risk premium (SVK) | 6.16% | 6.16% |
re | Rate of Equity | 8.76% | 8.91% |
Indicator/Sector | Furniture/Home Furnishings | Paper/ Forest Products | |
---|---|---|---|
rd | Rate of dept | 2.07% | 2.07% |
t | Corporate tax rate | 21% | 21% |
rd × (1 − t) | Rate of dept after tax | 1.64% | 1.64% |
D/C | Dept share | 0.13 | 0.395 |
re | Rate of equity | 8.76% | 8.91% |
E/C | Equity share | 0.87 | 0.605 |
WACC | Expected rate of return | 7.84% | 6.04% |
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Share and Cite
Kánová, M.; Drábek, J.; Ćurić, P.; Pirc Barčić, A. Quantification of Expected Return of Investment in Wood Processing Sectors in Slovakia. Forests 2024, 15, 75. https://doi.org/10.3390/f15010075
Kánová M, Drábek J, Ćurić P, Pirc Barčić A. Quantification of Expected Return of Investment in Wood Processing Sectors in Slovakia. Forests. 2024; 15(1):75. https://doi.org/10.3390/f15010075
Chicago/Turabian StyleKánová, Martina, Josef Drábek, Petar Ćurić, and Andreja Pirc Barčić. 2024. "Quantification of Expected Return of Investment in Wood Processing Sectors in Slovakia" Forests 15, no. 1: 75. https://doi.org/10.3390/f15010075
APA StyleKánová, M., Drábek, J., Ćurić, P., & Pirc Barčić, A. (2024). Quantification of Expected Return of Investment in Wood Processing Sectors in Slovakia. Forests, 15(1), 75. https://doi.org/10.3390/f15010075