Implied Cost of Equity Capital and Growth Rate: Evidence in the Mongolian Stock Market

Abstract

This study simultaneously estimates the implied cost of equity capital (COC) and the growth rate in the Mongolian Stock Market over the period from 2002 to 2006 using a residual income reverse-engineered model derived by James A. Ohlson. It also compares the Mongolian COC to the commercial banks savings rates in Mongolia and to the COC in the USA. The results show that the COC in Mongolia varies from 20% in 2006 to 23% in 2004, and the equity premium averages 9% over the examined years. They also reveal that the growth rate in residual income ranges from 1% in both 2002 and 2004 to 3% in 2005, and it is positively associated with the return on assets, return on equity and price-to-book ratio. When compared to the USA, the COC in Mongolia is much higher; however, the comparison of equity premium in both countries shows a relatively smaller difference due to high T-bond rates in Mongolia.