| Cost of Capital in Regulation and Competition Policy |
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Day 1
Wednesday, 24th September 2014
| 09:30 |
Morning Refreshments
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| 10:00 |
Introduction to course
- Purpose and format of course
- Welcome and introductions
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| 10:15 |
Role of cost of capital in regulation and competition policy
- Definition of the cost of capital
- Importance of cost of capital in setting price limits
- Link with risk mitigants
- Use of cost of capital in competition policy
- Challenges when using cost of capital for competition policy purposes
- The WACC formula
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| 10:50 |
The Capital Asset Pricing Model (CAPM)
- Assumptions behind CAPM
- Diversifiable and non-diversifiable risks
- The CAPM formula
- Why regulators and competition authorities use CAPM
- Drawbacks of CAPM
- Ad hoc adjustments – arguments for and against
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| 11:25 |
Refreshments
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| 11:40 |
Risk free rate
- Estimation from gilt market data
- Impact of Quantitative Easing (QE)
- Interpretation of regulatory precedents
- Use of international evidence
- Adjusting for country default risk
- Use of swap rates
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| 12:25 |
Equity risk premium
- Total market returns and equity risk premium
- Use of historic returns data
- Arithmetic versus geometric mean
- Impact of recessions and booms
- Forward-looking methodologies
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| 13:00 |
Lunch break
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| 14:00 |
Betas
- Asset, equity and debt betas
- Estimation of equity betas from market data
- Blume and Bayesian adjustments
- Comparator beta analysis
- De-levering and re-levering equity betas
- When debt betas are important
- Accounting betas
- Fundamental betas
- Disaggregation of group beta estimates
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| 15:00 |
Cost of debt
- Estimation from corporate bond data
- Decomposition of the debt premium
- Embedded debt
- Indexation of the cost of debt
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| 15:35 |
Refreshments
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| 15:50 |
Break-out session – estimating the cost of equity and the cost of debt
In this session, attendees will break out into smaller groups to practice estimating the cost of capital using data sets provided, with some groups focusing on the cost of equity and others on the cost of debt.
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| 16:50 |
Wrap-up from break-out session
- Each break-out group to present back to overall group
- Share and discuss the key lessons to take away from each break-out group
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| 17:20 |
Day one summary
- Brief recap of day one topics
- Final Q&A from day one
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| 17:30 |
Close of day one
Day 2
Thursday, 25th September 2014
| 09:30 |
Quick refresher session
- Brief overview of what was covered on previous day
- Introducing the key topics for Day Two
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| 09:45 |
Gearing
- Effect of capital structure
- Choosing a notional level of gearing
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| 10:00 |
Taxes
- Pre-tax, post-tax and vanilla cost of capital
- Allowing for tax liabilities within price limits
- Statutory versus effective tax rate
- Taking account of the tax advantages of debt
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| 10:15 |
Financeability
- What financeability is and why regulators pay attention
- Credit ratings and financial ratios
- Potential causes of problems with financeability
- Assessing financeability
- Market solutions
- Regulatory solutions
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| 11:00 |
Coffee break
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| 11:15 |
Break-out session – financeability
Breaking into groups, attendees will examine a possible financeability problem and recommend a solution. Each group will approach the problem either from the perspective of the company, the regulator or a consumer organisation.
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| 12:00 |
Wrap-up from break-out session
- Each break-out group to present back to overall group
- Different perspectives compared / debated
- Share and discuss the key lessons to take away from each break-out group
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| 12:30 |
Lunch
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| 13:30 |
Small company premium
- Ofwat’s historic use of small company premium
- Arguments for and against
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| 13:45 |
Other models for estimating the cost of capital
- Use of other models
- Dividend Growth Model (DGM)
- Multi-period DGM
- Fama-French Three Factor Model
- Third Moment CAPM
- Tobin’s Q / Market to Asset Ratios
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| 14:30 |
Break-out session: other models for estimating the cost of capital
Breaking into smaller groups, attendees will explore the use of models other than CAPM for estimating the cost of capital, with different groups focusing on different models.
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| 15:30 |
Refreshments
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| 15:45 |
Wrap-up from break-out session
- Each break-out group to present back to overall group
- Share and discuss the key lessons to take away from each break-out group
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| 16:15 |
Profit margins
- Use of profit margins for firms with low fixed assets (e.g. retail utility companies)
- Comparator benchmarks
- Applying WACC to estimates of working capital / intangible assets
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| 16:45 |
Course summary and conclusions
- Brief summary of what has been learned during course
- Final opportunity to ask questions
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| 17:00 |
Close of course
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| Location Central Location, London |
Additional Information about this event: |
From Wednesday 24 September 2014 - 09:30am
To Thursday 25 September 2014 - 05:00pm
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| Official Event Website: more info |
| Number of expected attendees: Not defined |
| This event has an exhibit: Not defined |
| YouTube Video for this event: |
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| Contact Marketforce Business Media Ltd |
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