Estimating the Cost of Equity Capital for Electric Utilities: 1958-1976
Volume: Volume 10, No. 2
Issue: Autumn 1979
Pages: pp. 619-635
Authors: Howard E. Thompson
Title: Estimating the Cost of Equity Capital for Electric Utilities: 1958-1976
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.
JEL Classification
Industry Studies Electrical, Gas, Communication, and Information Services (6352)