Estimating WACC for Regulated Industries on Developing Financial Markets and in Times of Market Uncertainty

Igor Stubelj, Primoz Dolenc and Mateja Jerman
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Igor Stubelj: University of Primorska, Slovenia
Primoz Dolenc: University of Primorska, Slovenia
Mateja Jerman: University of Primorska, Slovenia

Managing Global Transitions, 2014, vol. 12, issue 1 (Spring), 55-77

Abstract: The paper deals with the estimation of weighted average cost of capital (WACC) for regulated industries in developing financial markets from the perspective of the current financial-economic crisis. In current financial market situation some evident changes have occurred: risk-free rates in solid and developed financial markets (e. g. USA, Germany) have fallen, but due to increased market volatility, the risk premiums have increased. The latter is especially evident in transition economies where the amplitude of market volatility is extremely high. In such circumstances, there is a question of how to calculate WACC properly. WACC is an important measure in financial management decisions and in our case, business regulation. We argue in the paper that the most accurate method for calculating WACC is the estimation of the long-term WACC, which takes into consideration a long-term stable yield of capital and not the current market conditions. Following this, we propose some solutions that could be used for calculating WACC for regulated industries on the developing financial markets in times of market uncertainty. As an example, we present an estimation of the capital cost for a selected Slovenian company, which operates in the regulated industry of electric distribution.

Keywords: cost of capital; CAPM; WACC; return; risk (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2014
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