Free Cash Flow and Market Value of Firm: The Mediation Effect of weighted average cost of Capital

Authors

  • Abdul Kareem M. Mohammed Accounting Department, Dijlah University College, Baghdad, Iraq
  • Jabber S. Al-Sarraji دائرة البحث والتطوير، وزارة التعليم العالي والبحث العلمي، بغداد، العراق
  • Arshad F. Altameemi كلية العلوم الإدارية والمالية، جامعة الشعب، بغداد، العراق

DOI:

https://doi.org/10.56967/ejfb2023308

Keywords:

Free Cash Flow (FCF), Weighted Average Cost of Capital (WACC), Market Value Added (MVA), Market Value of Equity (MVE), Capital Asset Pricing Model (CAPM), Beta Coefficient (β)

Abstract

Abstract

This study tests the effect of capital costs on the relationship between free cash flow (FCF) and market value. The study selected twenty-six corporations that were listed on the Jordan securities market from 2010 to 2019. The FCF is an independent variable, cost of capital is a mediation variable (proxy of WACC), and market value added (proxy of firm’s value) is a dependent variable. Baron & Kenny's methodology and the Sobel-test were used to analyze the data of the four hypotheses, including the mediation effect of capital costs on FFC & MVA. Based on the Sobel test results, there is a partial mediation effect of the cost of capital between the free cash flow and the market value added of the firm, and the free cash flow is positively related to the market value added. Therefore, FCF has the capability to send positive signals to financial market participants about the firm's performance.

Keywords: - Free Cash Flow (FCF), Weighted Average Cost of Capital (WACC), Market Value Added (MVA), Mmarket Value of Equity (MVE), Capital Asset Pricing Model (CAPM), Beta Coefficient (β). 

 

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Published

2023-08-25

How to Cite

Mohammed ع., السراجي ج., & Altameemi ا. (2023). Free Cash Flow and Market Value of Firm: The Mediation Effect of weighted average cost of Capital. Entrepreneurship Journal for Finance and Business, 4(3), 132–142. https://doi.org/10.56967/ejfb2023308

Issue

Section

Research articles

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