A practical two-day workshop

 

5 – 6 March 2019 | Central London

By attending this two-day course, you will benefit from a detailed understanding of the factors affecting cost of capital, including WACC, Capital Asset Pricing Model, equity risk premium, cost of debt, financability and more. As well as expert presentations from Europe Economics, this course features interactive breakout sessions to give attendees hands-on experience of the models.

Key Benefits of Attending

This two-day course INCLUDES

An understanding of the role played by the cost of capital in regulation and competition policy

In-depth knowledge of how regulators and competition authorities estimate the cost of equity using the Capital Asset Pricing Model (CAPM)

Expertise in estimating the cost of debt, determining a notional gearing level, and allowing for tax liabilities

Know-how in assessing finance-ability and addressing any finance-ability problems

Insights into how models other than CAPM can be used to estimate the cost of capital

Course Trainers

Stephen-Topping

Stephen Topping

Managing Consultant, Europe Economics

Stephen Topping is a Managing Consultant at Europe Economics and an expert on the cost of capital. He has over 18 years’ experience advising clients across a range of utility and transport sectors, including clients in the energy, water, airports, rail and telecoms sectors. He has worked on secondment within Ofwat, Ofgem, Ofcom and the (then) OFT.

Andrew-Lilico

Dr Andrew Lilico

Director, Europe Economics

Dr Andrew Lilico is a Director of Europe Economics and is a leading finance expert. He has directed major projects on the cost of capital for regulators and companies across different sectors. He has lectured at UCL in Corporate Finance, Money and Banking, and Macroeconomics. He is a member of the IEA/Sunday Times Shadow Monetary Policy Committee, and is a frequent commentator on the BBC, Sky, Bloomberg and CNBC.

Course Agenda

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5 March 2019

6 March 2019

Morning

9:30

Morning refreshments


10:00

Introduction to course

  • Purpose and format of course
  • Welcome and introduction

10:15

The role of cost 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

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

11:25

Refreshments


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

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

13:00

Lunch

Afternoon

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

15:00

Cost of debt

  • Estimation from corporate bond data
  • Decomposition of the debt premium
  • Embedded debt
  • Indexation of the cost of debt

15:35

Refreshments


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.


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

17:20

Day one summary

  • Brief recap of day one topics
  • Final Q&A from day one

17:30

End of day one


Morning

9:30

Quick refresher session

  • Brief overview of what was covered on previous day
  • Introducing the key topics for Day Two

9:45

Gearing

  • Effect of capital structure
  • Choosing a notional level of gearing

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

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

11:00

Refreshments


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.


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

12:00

Lunch

Afternoon

13:45

Small company premium

  • 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

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.


15:30

Refreshments


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

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

16:45

Course summary and conclusions

  • Brief summary of what has been learned during course
  • Final opportunity to ask questions

17:00

Close of course


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