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Capital Market-Based Calculation of the Cost of Equity

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Price Regulation and Risk

Part of the book series: Lecture Notes in Economics and Mathematical Systems ((LNE,volume 641))

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Abstract

To conduct cash flow-based business valuations, the projection of future cash flow is necessary. The future cash flow is to be evaluated by means of an appropriate discount interest calculation.

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Notes

  1. 1.

    cf. Ross (1976).

  2. 2.

    cf. Mandl and Rabel (1997), p. 310; Buckley et al. (2000), p. 283 ff.

  3. 3.

    cf. Fama and French (1992).

  4. 4.

    cf. Markowitz (1952).

  5. 5.

    cf. Tobin (1957).

  6. 6.

    cf. Sharpe (1964); along with Sharpe, CAPM goes back to Lintner, Treynor and Mossin as well.

  7. 7.

    cf. Damodaran (2001), p. 164 f.

  8. 8.

    cf. Mandl and Rabel (1997), p. 290; Copeland et al. (2002), p. 265; Fischer (2002), p. 74; Drukarczyk (2001), p. 354.

  9. 9.

    cf. among others Fischer (2002), p. 75; Mandl and Rabel (1997), p. 290; Spremann (2006), p. 310; Copeland et al. (2002), p. 265; Franke and Hax (2004), p. 353.

  10. 10.

    cf. Mandl and Rabel (1997), p. 290; Fischer (2002), p. 74, 103; Copeland et al. (2002), p. 265; Damodaran (2001), p. 155 ff.

  11. 11.

    cf. Spremann (2006), p. 314 f.

  12. 12.

    cf. Mandl and Rabel (1997), p. 290 f.; Purtscher (2006), p. 108.

  13. 13.

    cf. Mandl and Rabel (1997), p. 291; Ballwieser (2002), p. 738; Fischer (2002), p. 71 f.; Damodaran (2001), p. 164.

  14. 14.

    cf. Brennan (1971); Black (1972); Merton (1973); Rubinstein (1976); Lucas (1978); Breeden (1979); Hansen and Richard (1987); Overviews on this by: Rudolph (1979) and Copeland and Weston (1988), among others.

  15. 15.

    cf. Fama (1977), p. 7 ff.

  16. 16.

    cf. Ballwieser (2002), p. 737; Purtscher (2006), p. 109.

  17. 17.

    cf. Purtscher (2006), p. 109.

  18. 18.

    cf. Ballwieser (2002), p. 738; Busse and Colbe (2002), p. 7; Copeland et al. (2002), p. 266.

  19. 19.

    cf. Ballwieser (2002), p. 737.

  20. 20.

    cf. Daske and Gebhardt (2006), p. 531; Mandl and Rabel (2006), p. 104 f.

  21. 21.

    cf. Purtscher (2006), p. 109.

  22. 22.

    cf. Ballwieser (2002), p. 739; Purtscher (2006), p. 109.

  23. 23.

    cf. Copeland et al. (2002), p. 271.

  24. 24.

    cf. Maier (2001), p. 299; Daske and Gebhardt (2006), p. 531; It must be especially noted that the data used does not include events such as wars or currency reforms, as long as these events are not expected in the future.

  25. 25.

    When using historical returns to calculate the beta factor, one is bound by the following assumption: ex-ante probability distribution = ex-post probability distribution, stochastically independent of the realization of returns, stationary process of returns generation within one period; cf. among others, Maier (2001), p. 300.

  26. 26.

    cf. Mandl and Rabel (1997), p. 297; Fischer (2002), p. 75.

  27. 27.

    cf. Fischer (2002), p. 74; Mandl and Rabel (1997), p. 297.

  28. 28.

    cf. Mandl and Rabel (1997), p. 306; Purtscher (2006), p. 111; Knieps (2003), p. 1000;

    Maier (2001), p. 299.

  29. 29.

    cf. Mandl and Rabel (1997), p. 299.

  30. 30.

    cf. Mandl and Rabel (1997), p. 299.

  31. 31.

    cf. Buckley et al. (2000), p. 311; Spremann (2006), p. 344 f.; Born (1995), p. 151 f.; Nielsen (1992), p. 228 ff.; Mandl and Rabel (1997), p. 306.

  32. 32.

    cf. Mandl and Rabel (1997), p. 306.

  33. 33.

    cf. Fischer (2002), p. 129 f.; Buckley et al. (2000), p. 313 ff.; Drukarczyk (2001), p. 357.

  34. 34.

    cf. Mandl and Rabel (1997), p. 299 f.; Fischer (2002), p. 126.

  35. 35.

    cf. Mandl and Rabel (1997), p. 300.

  36. 36.

    cf. Hachmeister (2000), p. 217 ff.

  37. 37.

    cf. Laux (2003), p. 208.

  38. 38.

    The theoretical validity of CAPM for additional consideration of an investment possibility not yet contained in the market index is shown by Spremann (2006), p. 324 ff.

  39. 39.

    cf. Oertmann and Zimmermann (1996), p. 276.

  40. 40.

    cf. Spremann (2006), p. 334 ff.; Spremann (2007), p. 456 f.

  41. 41.

    cf. Basu (1977); Reinganum (1981); Sharpe et al. (1993).

  42. 42.

    cf. Spremann (2007), p. 461.

  43. 43.

    cf. among others Hung et al. (2004), p. 89; Spremann (2007), p. 459.

  44. 44.

    An overview on works confirming this effect is given by Spremann (2006), p. 338 f.

  45. 45.

    cf. Fama and French (1992), p. 434; an overview on the works from Fama/French in the 1990s is given by, among others: Spremann (2007), pp 462–464; Spremann (2006), p. 341 ff.; Franke and Hax (2004), p. 357; Ziegler et al. (2007), p. 359 ff.; Wallmeier (2000), p. 32 ff.

  46. 46.

    cf. Damodaran (2001), p. 173 f.

  47. 47.

    cf. Roll (1977); Damodaran (2001), p. 172; Spremann (2006), p. 331 ff.; Wallmeier (2000), p. 34.

  48. 48.

    cf. Wallmeier (2000), p. 34.

  49. 49.

    cf. Zimmermann (1997), p. 62.

  50. 50.

    cf. Ulschmid (1994), p. 210.

  51. 51.

    cf. Becker (2000), p. 39.

  52. 52.

    The form known in German as the “method of least squares” for determining regression lines is described as an “OLS method”.

  53. 53.

    cf. Becker (2000), p. 41; Hachmeister (2000), p. 194.

  54. 54.

    cf. Becker (2000), p. 42 f.

  55. 55.

    cf. Mandl and Rabel (1997), p. 297 f.

  56. 56.

    cf. Hachmeister (2000), p. 197.

  57. 57.

    cf. Timmreck (2002), p. 302; Becker (2000), p. 51.

  58. 58.

    cf. Frantzmann (1990), p. 71; Pfennig (1993), p. 17.

  59. 59.

    Pedell (2007) writes about this: “… When estimating beta factors, gearing towards past data is particularly problematic because significant structural breaks regarding risk can result for companies whose fees are regulated, precisely from changes in regulation itself. The estimated beta factors are thus to be interpreted carefully and adjusted, if necessary, especially for changes in the regulation mechanism. These type of adjustments require a foundation from theoretical and empirical knowledge about the determination of the risk in regulated comanies. …”, Pedell (2007), p. 47. Please note, that this is a translation (German).

  60. 60.

    It is noted in advance that there are no plausible reasons for the inherent preference of one of these procedures compared with other procedures in general. cf. Pfennig (1993), p. 23.

  61. 61.

    cf. Blume (1971).

  62. 62.

    cf. Zimmermann (1997), p. 246.

  63. 63.

    cf. Ulschmid (1994), p. 248.

  64. 64.

    cf. Hachmeister (2000), p. 187.

  65. 65.

    cf. Hachmeister (2000), p. 187 f.; Ulschmid (1994), p. 252.

  66. 66.

    cf. Schultz and Zimmermann (1989), p. 201; Zimmermann (1997), p. 249.

  67. 67.

    cf. Küpper (2002), p. 31; König and Benz (1997), p. 70 ff.; Geradin et al. (2005), p. 25 ff.

  68. 68.

    cf. Küpper (2002), p. 32 f.; taken from: Broomwich and Vass (Broomwich and Vass (2002)), Sp. 1678.

  69. 69.

    cf. Küpper (2002), p. 34; taken from: Broomwich and Vass (2002), Sp. 1679.

  70. 70.

    cf. Küpper (2002), p. 33 f.

  71. 71.

    cf. Knieps (2003), p. 994; Seicht (2001), p. 105 ff. and 115 ff.

  72. 72.

    Swoboda (1990), p. 66 ff. Please note that this is a translation (German).

  73. 73.

    cf. Swoboda (1990), p. 67.

  74. 74.

    cf. Swoboda (1990), p. 67 f.; Swoboda (1992), p. 84.

  75. 75.

    cf. Swoboda (1990), p. 68.

  76. 76.

    cf. Swoboda (1990), p. 68.

  77. 77.

    cf. Swoboda (1990), p. 69.

  78. 78.

    cf. Seicht (1996), p. 345; Mayer (2002), p. 197.

  79. 79.

    Even the ordinance on charges for system use stipulates for prices to be allowed that these “… are to be determined based on costs …”, cf. Mayer (2002), p. 197.

  80. 80.

    Swoboda (1996), p. 365. Please note that this is a translation (German).

  81. 81.

    Swoboda (1996), p. 364. Please note that this is a translation (German).

  82. 82.

    cf. Swoboda (1992), p. 83; Swoboda (1996), p. 366.

  83. 83.

    cf. Seicht (1996), p. 351 ff.

  84. 84.

    cf. Seicht (1996), p. 355.

  85. 85.

    cf. Swoboda (1990), p. 70.

  86. 86.

    cf. Swoboda (1990), p. 70; Swoboda (1996), p. 372 ff.

  87. 87.

    cf. Swoboda (1990), p. 71.

  88. 88.

    cf. Swoboda (1990), p. 71.

  89. 89.

    cf. Busse and Colbe (2002), p. 9.

  90. 90.

    cf. Busse and Colbe (2002), p. 9.

  91. 91.

    cf. Busse and Colbe (2002), p. 4.

  92. 92.

    cf. Swoboda (1996), p. 376.

  93. 93.

    cf. Swoboda (1996), p. 376 f.

  94. 94.

    Swoboda (1996), p. 377.

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Hierzenberger, M. (2010). Capital Market-Based Calculation of the Cost of Equity. In: Price Regulation and Risk. Lecture Notes in Economics and Mathematical Systems, vol 641. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-12047-3_2

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