# The cost of capital, estimating the rate of return for public utilities

by A. Lawrence Kolbe

Publisher: MIT Press in Cambridge, Mass

Written in English

## Subjects:

• Public utilities -- Rate of return,
• Public utilities -- Finance

## Edition Notes

Classifications The Physical Object Statement A. Lawrence Kolbe and James A. Read, Jr. with George R. Hall. Contributions Read, James A., Hall, George R., 1930- LC Classifications HD2763 .K64 1984 Pagination viii, 183 p. : Number of Pages 183 Open Library OL2849993M ISBN 10 0262110946 LC Control Number 84012241

Find many great new & used options and get the best deals for The Cost of Capital: Estimating the Rate of Return for Public Utilities Volume 3 by George R. Hall, James A., Jr. Read and A. Lawrence Kolbe (, Paperback) at the best online prices at . Equity is a bit more complex, as it is subjected to market (systematic) risk. The capital asset pricing model is a useful tool in estimating the cost of equity. Applying the WACC to the estimated rate of return for new projects and ventures is a simple way to determine if a project is sufficiently profitable to offset the cost (risk) of financing. We need to calculate WACC (Weighted Average Cost of Capital) for both of these companies. Let’s look at the WACC formula first – WACC Formula = E/V * Ke + D/V * Kd * (1 – Tax) Now, we will put the information for Company A, weighted average cost of capital formula of Company A = 3/5 * + 2/5 * * = = %. Valuation Market Essentials Switzerland - 31 December Our publication with relevant market data for Switzerland. This publication gives an overview of market multiples and cost of capital components per industry and includes also relevant macro-economic data used in business and other valuations such as impairment tests or purchase price allocations.

WACC is the average after-tax cost of a company’s various capital sources, including common stock, preferred stock, bonds, and any other long-term other words, WACC is the average rate a. Most utilities are regulated using cost of service in the U.S. Rate base is based on original cost minus depreciation Cost of Debt is generally the embedded cost of debt incl. issuance cost Key focus is on the Allowed Return on Equity (and in Canada the equity percentage) U.S.: equity thickness is usually the actual book equity. Rate base is the value of property on which a public utility is permitted to earn a specified rate of return, in accordance with rules set by a regulatory general, the rate base consists of the value of property as used by the utility in providing service. It may be calculated by any one or a combination of accounting methods, such as fair value, prudent investment, reproduction cost. Capital for Public Investment Projects: An Empirical Analysis of the Mexican Case. Andrea Coppola, Fernando Fernholz, and Graham Glenday. JEL Classification: H Key Words: Economic Opportunity Cost of Capital (EOCK), social discount rate, public investment projects, weighted cost of capital, supply price approach, tax externalities, Size: 1MB.

The detailed estimate of any phase of an estimate shall not be disclosed to the public and will be kept confidential until the end of the bid opening. WSDOT Cost Estimating Manual for Projects M Page iiiFile Size: KB. Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost Author: Will Kenton. common for investor-owned utilities ›In its simplest terms: Return= Rate Base x Rate of Return Rate Base is the net value of property (assets) used in providing service, on which a public utility is permitted to earn a specified rate of return, as determined by the commission Weighted average cost of capital is the rate of return. RATE OF RETURN: REGULATION Mark A. Jamison Public Utility Research Center University of Florida P.O. Box Gainesville, FL [email protected] Abstract Rate of return regulation adjusts overall price levels according to the operator’s accounting costs and cost of Size: KB.

## The cost of capital, estimating the rate of return for public utilities by A. Lawrence Kolbe Download PDF EPUB FB2

This book spells out the advantages and disadvantages of the major methods used to estimate the required rate of return. One of the most contentious questions in public utility regulation is what "fair" rate of return to allow s: 0. The Cost of Capital: Estimating the Rate of Return for Public Utilities [Kolbe, A.

Lawrence, Read Jr, James A, Hall, George R] on *FREE* shipping on qualifying offers. The Cost of Capital: Estimating the Rate of Return for Public UtilitiesCited by: The Cost of Capital: Estimating the Rate of Return for Public Utilities.

by KOLBE, A. lawrence & READ, James A. with HALL, George R. The MIT Press, Hardcover. Reprint. of different types of capital or component costs of capital The cost of capital discussed.

Capital Structure Commission authorizes the percentage of common equity, preferred stock and debt that utilities are estimated to hold based on a reasonable capital structure. The authorized capital structure is used to estimate authorized rate of return (ROR).

"The cost of capital: Estimating the rate of return for public utilities: A. Lawrence Kolbe and James Read, with George R. Hall, (MIT Press, Cambridge, MA, )," Information Economics and Policy, Elsevier, vol.

2(1), pages Get this from a library. The cost of capital: estimating the rate of return for public utilities.

[A Lawrence Kolbe; James A Read; George R Hall]. The formula gives the utility little incentive to reduce operating costs as these are passed through allowing full recovery. As long as the rate of return (rr) is above the cost of debt, the rate base can be inflated by spending more capital than necessary.

The rr is almost always well above the cost of debt. If a utility has a capital structure of 50% debt, as regulators. INTRODUCTION TO COST OF CAPITAL. IN A UTILITY-REGULATION CONTEXT. • k is the truly anticipated rate of return prevailing in the capital mkts on alternative investments of equivalent risk and methods for estimating the firm’s cost of equity (k e) ESTIMATING k e.

The rates of return allowed by public utility commissions varies, but a return on the rate base of 8% to 10% per year is a good representative figure. ‹ Electricity Industry Structure and Regulation up Economic Dispatch and Operations of Electric Utilities ›. ALLOWED RATE OF RETURN n Capital Structure n Example: Debt 2, 40% 8% % Equity 3, 60% 12% % TOTAL 5, % Overall rate of return multiplied by rate base as part of revenue requirement computation.

Cost of debt determined by average of the actual interest (coupo n) rate on the debt Size: KB. Rate of Return Finance Required Operating Income X = = Expenses Accounting & others + Customer Revenue Requirement Designing Rates Rates Dept. 3 The Rate of Return is the utility’s Cost of Capital.

It is the sum of the weighted costs of debt and equity invested in the utility. Traditional Ratemaking Formula. A utility’s Rate of Return (ROR), or Cost of Capital (CoC), is the weighted average cost of debt, preferred equity, and common equity a utility has issued to finance its investments.

Return on Equity (ROE) is the ratio of a utility’s net income over its rate base common equity. Get this from a library. The cost of capital, estimating the rate of return for public utilities.

[A Lawrence Kolbe; James A Read; George R Hall]. The Cost of Capital, Volume 3. Estimating the Rate of Return for Public Utilities. This book spells out the advantages and disadvantages of the major methods used. A one-stop shop for background and current thinking on the development and uses of rates of return on capital.

Completely revised for this highly anticipated fifth edition, Cost of Capital contains expanded materials on estimating the basic building blocks of the cost of equity capital, the risk-free rate, and equity risk premium.

There is also discussion of the volatility. Find helpful customer reviews and review ratings for The Cost of Capital: Estimating the Rate of Return for Public Utilities at Read honest and 5/5.

The preferred stock pays interest of \$1, The risk-free rate of return is 5%, the return on the Dow Jones Industrials is 12%, and Jolt’s beta is To calculate Jolt’s cost of capital, we first determine its cost of debt, which is as follows: (\$4, Interest Expense) x (1 Tax Rate).

A widely used model to estimate the cost of common equity capital for public utilities is the risk premium approach.

This approach often estimates the expected rate of return. generally synonymous with “the cost of capital.” It refers to the rate of return on rate base required to recover the utility’s: Cost of debt Cost of preferred stock Cost of common equity The total dollar amount of return, or earnings, is calculated by multiplying the allowed rate of return by the utility’s total dollar amount of rate base.

If Express Press always uses its weighted average cost of capital, or average required rate of return, to evaluate all of these capital budgeting projects, then the company might make an incorrect decision, or a mistake, by a. accepting projects that actually should be rejected. accepting projects with internal rates of return that are too high.

by Bob Shively, Enerdynamics President and CEO “ process of setting an allowed ROE has consistently proven to be the most contentious and subjective part of a rate case proceeding.” Much of the key natural gas and electricity infrastructure in the U.S. operates under the cost-of-service ratemaking.

This is true for electric transmission and distribution, gas. Formula for Rate of Return. The standard formula for calculating ROR is as follows: Keep in mind that any gains made during the holding period of the investment should be included in the formula.

For example, if a share costs \$10 and its current price is \$15 with a dividend of \$1 paid during the period, the dividend should be included in the ROR formula. The rate of return is a combination of the cost of paying back its debt holders with interest and the return utilities provide to their equity shareholders.

Not surprisingly, the most controversial part of this formula is calculating the utility’s allowed return on equity (ROE) – this is the only portion of the revenue requirement that a. The firm's marginal tax rate is 40 percent.

Its capital structure, considered to be optimal, is as follows: Debt \$, Common equityTotal liabilities and equity \$, a. Calculate Foust's after-tax cost of new debt and common equity.

Calculate the cost of equity. Find Foust's weighted average cost of capital. New Regulatory Finance is an invaluable text for economists, accountants, CFOs, attorneys, regulators, or anyone involved in capital-related decisions.

Written by a preeminent professor of finance who has testified on corporate finance and cost-of-capital issues before numerous regulatory agencies, the book reflects on the changes in the utility industry and associated impacts on capital.

Introduction. Regulators, public utilities, and other financial practitioners of utility rate setting in the United States and other countries often use the Capital Asset Pricing Model (CAPM) to estimate the rate of return on common equity (cost of common equity).

1 Typically, the ordinary least squares method (OLS) is the preferred estimation method for the CAPM betas of public by: 2. The WACC Calculator is used to calculate the weighted average cost of capital (WACC). In finance, the weighted average cost of capital, or WACC, is the rate that a company is expected to pay on average to all its security holders to finance its assets.

The WACC is the minimum acceptable return that a company must earn on an existing asset base. Kolbe et al. () 9give a general survey of the literature on estimating the cost of capital for regulated firms. Their emphasis is on methods used for establishing the allowed rate of return for public utilities in rate hearings.

They separate the approaches in use into five categories, and. Weighted Average Cost of Capital (WACC) is the rate that a firm is expected to pay on average to all its different investors and creditors to finance its assets. You can use this WACC Calculator to calculate the weighted average cost of capital based on the cost of equity and the after-tax cost.

Organizations typically define their own "cost of capital" in one of two ways: Firstly, "Cost of capital" is merely the financing cost the organization must pay when borrowing funds, either by securing a loan or by selling bonds, or equity financing.

In either case, the cost of capital appears as an annual interest rate, such as 6%, or %. The standard formula for estimating the cost of equity capital—or, depending on your perspective, an investor’s required rate of return on equity—is the capital .Rate-of-return regulation is a system for setting the prices charged by government-regulated monopolies.

The main premise is that monopolies must charge the same price that would ideally prevail in a perfectly-competitive market, equal to the efficient costs of production, plus a market-determined rate of return on capital.Estimating the cost of debt should be a no-brainer.

But when survey participants were asked what benchmark they used to determine the company’s cost of debt, only 34% chose the forecasted rate.