Methods for risk premium: Application for agriculture companies in Czech Republic

Abstract

In business valuation, alternative cost of equity plays an important role considering the risk related to investment. Even a slight change in cost of equity can significantly affect the resulting business value. However, in the Czech Republic, risk premium has not been adequately addressed in terms of methodology. The objective of the paper is to explore the application of selected methods in calculating risk premium, and to select or modify existing methodology for the calculation of risk premium used in agricultural companies. For the purposes of determining the alternative cost of equity, three methods are selected: build up model, CAPM, and Fama and French Three Factor model; internal data of a family farm XY are used. Beta coefficient is calculated on the basis of the input data, and the results of the individual methods are compared. Based on the data of companies operating in the Czech market, the performed analysis suggests that the Build Up model is suitable for expressing alternative cost of equity. The agriculture sector is very specific, as agricultural companies are the first to be affected by the climate change. A follow-up study could be focused on the analysis and prediction of the impacts of climate change, with possible emphasis on the importance of weather derivatives for agriculture companies.

Analyzing the Financial Risks and Investment Values of Chinese Airline Companies

“…By contrasting the Build Up model, CAPM, and Fama and French Three Factor Model, Machova et al researched the various approaches to determining risk premiums for farm enterprises in the Czech Republic and concluded that the Build Up model is the most appropriate [7]. Using the panel regression approach, Gharaibeh, and AL-Tahat researched the variables that affected the capital structures of service companies in Jordan in the past 4 years since 2018.…”

El modelo de fijación de precios de activos de capital aplicado en grandes empresas

“…La investigación methods for risk premium: Application for agriculture companies in Czech Republic, de los autores Machová, Kučera & Kašparová (2022), aborda la importancia del costo alternativo del capital en la valoración de empresas y cómo la prima de riesgo juega un papel fundamental en el cálculo de este costo. El objetivo del artículo es explorar diferentes métodos para calcular la prima de riesgo y seleccionar el más adecuado para las empresas agrícolas en la República Checa.…”