The Relationship between P/E and P/B Evaluation Ratios and Cost of Capital of the Companies

This study seeks to investigate the relationships between price to earnings ratio (P/E), price to book value (P/B), corporate size, financial leverage and cost of capital. The statistical population of the study includes all the companies registered in Tehran Exchange Market in the period between 2001 and 2010. The sample consisted of 85 companies which had been selected by industry. The data were collected from the sources released by the Central Bank, Tehran Exchange Market and Rah Avard Novin Software. Panel regression model along with Hausman test were used to control the significance of random-effects and fixed-effects models. EXCEL software was used for data analysis and STATA software was utilized to extract inferential statistic results. The results suggested a reverse and significance correlation between the P/E ratio and the cost of capital. This was also true about the P/B ratio and the cost of capital. There was also a significant and direct correlation between the corporate size and the cost of capital.