The cost of capital is the expected return required by investors to provide finance to a particular project or firm. Cost of capital assessments play a key role in a variety of settings (e.g. price controls, assessment of the financial viability of projects, and assessment of profitability in competition cases).
We can advise clients (whether regulators, price regulated firms or other stakeholders) on all aspects of the cost of capital.
For example, this includes:
Methodology for cost of capital — advising on specific methodological issues related to the Weighted Average Cost of Capital (WACC).
Estimation of cost of capital — estimating the cost of capital for projects, firms or sectors using the Capital Asset Pricing Model (CAPM) or other models (e.g. Dividend Growth Model, third moment CAPM, Fama-French model), drawing on market data and regulatory precedents.
Financeability — assessing the financeability of price control proposals, and advising on how any financeability problems that are identified should be addressed.
Support in price review process — providing support on the cost of capital and financeability to regulated firms or regulators in the context of price control reviews (e.g. by providing them with analysis and assisting them in responding to representations from other parties). Our wider price control expertise is presented in more detail here.
Policy assessments — assessing the impact of policy interventions (e.g. changes in regulatory frameworks) on firms’ cost of capital.
Analysis of business risk — modelling the systemic risk (i.e. those correlated with the broader economy) of business activities.
Financial viability of capital projects — assessing the expected costs of financing capital projects.
Macroeconomic analysis — providing forward looking views on the macroeconomic cycle and its implications for the building blocks of the cost of capital (e.g. risk-free rate, asset betas, and debt premium). Our macroeconomic analysis expertise is presented in more detail here.