The Application of Build-up Approach in Cost of Equity Calculation of Mining Enterprises

Aneta Michalak
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Aneta Michalak: Silesian University of Technology, Poland

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Abstract: Cost of equity calculation is a complex problem in corporate finance management. In practice such calculation is most often based on CAPM (Capital Asset Pricing Model), however, world literature and experience of developed countries indicate a possibility to use many derivatives of this method as well as new alternative methods, among which Build-up Approach is worth analyzing. Similarly to CAPM method, a starting point of this method is to determine a risk-free discount rate. Next, as in CAPM method, there is risk premium calculated. The other steps are different in Build-up Approach from CAPM, and they consists in making adjustments for specific risk factors related to a particular enterprise. In the hereby paper there is an attempt made to implement the Build-up Approach in cost of capital calculation in the Polish mining enterprises. These are specific enterprises that require high capital outlays and are characterized by a high immobilization of assets. Considering their role in the energy policy of particular countries, it often happens that they are less determined by legal regulations and co-financing by public capital. Additionally, the largest enterprises in the mining industry are listed on stock exchange, what makes it difficult to estimate their cost of equity using classical CAPM.

Keywords: cost of equity; build-up approach; mining (search for similar items in EconPapers)
Date: 2014
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