Estimating the Cost of Equity Capital for Electric Utilities: 1958-1976

Howard E. Thompson

Bell Journal of Economics, 1979, vol. 10, issue 2, 619-635

Abstract: This articles uses an infinite growth model to estimate the cost of equity capital for electric utilities for the period 1958-1976. The infinite growth model permits the development of a simple linear regression relating market-price-to-book-value-ratios to rates of return. From this regression, an estimate of the average cost of equity capital can be derived for the firms in the sample. This particular study neither specifically recognizes capital structure or dividend policies of the individual firms nor specifically analyzes the effects of flow through-normalization or allowance for funds used during construction differences among companies. Although the analysis is historical, the methodology holds promise for being useful in determining "just and reasonable" rates of return in rate cases.

Date: 1979
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