The purpose of this paper is to estimate an alternative implied cost of capital inferred from a valuation model, and consider its validity and use. This paper presents interesting evidence in terms of a comparison with U.S. analysis results. While prior studies (e.g., Gode and Mohanram 2003) suggest the superiority of a cost of capital inferred from Gebhardt et al. (2001) model, this paper indicates that the cost of capital inferred from the PEG model and modified PEG model reflects risks more appropriately. Furthermore, we suggest that the correlation between the cost of capital and risk factors varies depending on periods. Although Gode and Mohanram (2003) pointed out that the difference in the cost of capital by industry is important, it is shown that the difference in a time series of cost of capital is more important in Japan.
Keywords: implied cost of capital PEG ratio modified PEG ratio risk factors