Cost of equity capital in agricultural organizations: theoretical approach and empirical analysis

The paper presents the methodology for estimation of the cost of equity capital in agricultural organizations. This methodology consists of two methods: modified CAPM and long-term ROE. The organizations in this sector of industry – family farms and agricultural companies – are family controlled or closely held. Being undiversified investors the owners of such organizations assume total risk, not only systematic one. Considering the undiversification of investors, systematic risk is replaced by total risk in CAPM, and accounting information is used instead of market information. OMXBB index is chosen as a market portfolio. As it is dangerous to rely on one method, long-term ROE is applied as additional method. The cost of equity capital is calculated in all Lithuanian agricultural organizations, in family farms and in agricultural companies. The research results show that modified CAPM is applicable for estimation of cost of equity capital in agricultural companies, but there are some problems with the application of modified CAPM in family farms