Does a financial leverage determine the cost of debt? The case of Slovenia
The capital (debt and equity) is the essential part of corporations’ (long-term) financing; it is one of production factors. Capital, either debt or equity is scarce and is therefore not a free commodity. Due to higher risk equity capital is usually a more expensive source of financing that debt capital. In capital budgeting decisions managers could be stimulated to finance a portion of the total capital needs of the company with debt capital at expected lower costs. The use of debt capital tends to lower weighted average cost of capital, but induces an additional risk: due to fixed obligations that come together with debt financing, the company becomes more risky. We denote companies that use debt capital as financial leveraged companies. Higher the financial leverage, higher the risk of the company and higher (in normal terms) the cost of debt. The aim of the presented research was establish and analyze the relationship between financial leverage and costs of debt financing in Slovenian publicly traded corporations. Due to the lack of primary data on cost of debt, we estimated the cost of debt using two different methodologies and involved regression analysis to analyze the relationship between the two variables. We used linear regression function to establish the relationship between the variables and used also selected controlling to eliminate the time and cluster dimension of the data. With the presented analysis we could not find a statistically significant relationship that we were seeking, but some ending results gives impulse for future work.
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