The empirically estimate the weighted average cost of capital for ten commercial banks in Pakistan that are listed in the Karachi Stock Exchange. The relationship between cost of capital and stock market returns of private commercial banks in Pakistan are examined. Therefore, our findings suggest that banks should try to lower their respective cost of capital in order to increase their market returns. The objective of this study is to find out the relationship between the Cost of capital and the market return.
The main objectives of our article work are:
- The primary focus is likely to determine why the market performance of commercial is inconsistent.
- To determine how the Cost of capital affects the market performance.
The article on the impact of cost of capital on market performance had been conducted on the commercial banks of Bangladesh. That article is going to be revised in the Pakistani context. As both countries are underdeveloped, so this article will help the Pakistani commercial banks to improve their market performance.
The scope of the project will only be limited to ten commercial banks of Pakistan. According to the annual reports of these banks for the calculation of cost of capital, banking system has to take part in an important role of the progress of the country. In developing countries like Pakistan for the growth of economy the banking system has to participate. A bank is like a heart and the capital is like blood supply to it in economic structure. If the blood is in circulation the organs will stay healthy and strong. Therefore, the whole economy will destroy if the capital is not supplied to any segment.
According to Cummins and Phillips costs of capital differ considerably for different types of economic activities. Using an inaccurate cost of capital can direct to the obliteration of firm worth through wrong project decision making and pricing decisions. The cost of debt capital is increased by the increased in leverage. For external financing debt typically is the merely accessible source. Cost of capital estimates diverge over time for a variety of reasons like changes in interest rates as well as changes in economic conditions may influence expected beta coefficients.
If an investment covers its cost of capital it is consider as doing well With no suitably imposed conservatism in accounting will leads to larger ambiguity, greater instability of expected prices, lower market values, and increased cost of capital.
Article Source: http://www.articlesbase.com/banking-articles/how-cost-of-capital-determine-the-market-performance-of-commercial-banks-in-pakistan-4648133.html
About the Author
Writing by professional author Farooq Khilji http://khilji-co.blogspot.com”>Burewala. He is a well reputed writer amongst the leading writers on Banking & Finance.
Tags: banking, banks in pakistan, commercial banks in pakistan, cost of debt, debt capital, karachi stock exchange, market performance, private commercial banks, project decision, stock market returns, weighted average cost of capital