The Effect of Systematic Risk on Cost of Capital Determinants Applying CAPM Model : Evidence from Tehran Stock Exchange (TSE)

A firm’s cost of capital should be determined by its exposures in respect of systematic risk, indicated by beta means how changes in systematic risk affect firm cost of capital and its determinants like cost of equity, cost of debt ,debt and equity financing mix. The most difficult component of the weighted average cost of capital to calculate is the cost of equity. One approach to estimate the cost of equity is the Capital Asset Pricing Model approach where the financial manager estimates the firm’s beta. A time series regression was used to estimate the beta. After dividing the firms’ systematic risk into three groups with low, middle and high beta, our findings provide that the beta factor has strong impact on the relationship between weighted average cost of capital and its determinants which indicates firms with high beta have significantly higher cost of equity, higher cost of debt, higher equity financing and lower debt financing and lower effective tax rate benefits and finally higher cost of capital. Also there is indirectly and insignificantly relationship between systematic risk and debt financial leverage which indicates debt financing and also financial leverage decreases insignificantly by increasing the beta and finally the cost of capital increases insignificantly. So Firms can benefit from improved systematic risk management through a reduction in their cost of equity capital, a shift from equity to debt financing, and higher effective tax benefits associated with the ability to add debt. The cost of capital that range from -17 to 100 basis points are followed by significant changes in the cost of equity that range from -20 to 130 basis points and significant changes in the cost of debt that range from 0 to 220 basis points