Open Access Article SciPap-896
Corporate Life Cycle Identification: A Model Based on Relationship Between Return on Equity and Cost of Equity
by Zdeněk Konečný 1,* and Marek Zinecker 2

1 Faculty of Business and Management, Department of Economics, Brno University of Technology, Kolejní 2906/4, Brno 61200, Czechia

2 Faculty of Business and Management, Department of Economics, Brno University of Technology, Kolejní 2906/4, Brno 61200, Czechia

* Authors to whom correspondence should be addressed.

Abstract: The theory of shareholder value maximisation implies that the ultimate aim of each entrepreneur is to increase the market value of the company, i.e. to maximise the wealth of shareholders. This concept assumes that the returns to shareholders should outperform the cost of capital. The higher the spread is, the better the position of shareholders. The capital assets pricing model has been very often used for calculation the cost of equity as implicit costs, where the risk-free rate, the expected return of the market and the premium to operational and financial risks in the form of beta coefficient is considered. Moreover, the return on equity is significantly dependent on the corporate life cycle. The purpose of this paper is to develop an innovative model identifying stages of the corporate life cycle while using two variables: the rate of economic profit and the share of operational and financial risk within the total entrepreneurial risk. The model is verified by using data of a selected company. Identifying stages of the corporate life cycle should simplify the risk management and subsequently raise the capital access.

Keywords: Return On Equity, Cost Of Equity, Financial Risks, Operational Risks, Rate Of Economic Profit

JEL classification:   D24 - Production • Cost • Capital • Capital, Total Factor, and Multifactor Productivity • Capacity,   G32 - Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill

SciPap 2017, 25(3), 896

Received: 21 December 2016 / Accepted: 23 October 2017 / Published: 5 December 2017