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Estimating the Cost of Capital for Crown Entities and State-Owned Enterprises (1997)

Publication Details

  • Estimating the Cost of Capital for Crown Entities and State-Owned Enterprises
  • Published: 1 Oct 1997
  • Status: Current
  • Author: The Treasury
  • Hard copy: Available in PDF format only. HTML available on request from
  • Persistent URL for bibliographic use:

Estimating the Cost of Capital for Crown Entities and State-Owned EnterprisesA Handbook Prepared for Treasury Staff

Published 1 Oct 1997

This Handbook is a guide for the staff of Treasury when estimating the cost of capital in relation to Crown entities or SOEs, or reviewing estimates undertaken by others. Other readers may also find the Handbook useful when undertaking these estimates.


This Handbook is to help staff of the Treasury to:

  • review other people's estimates of the cost of capital
  • prepare their own estimates of the cost of capital for Crown entities or SOEs.

The Handbook explains how to calculate the cost of capital for value based reporting, and then reviews how this calculation could change if the cost of capital was required for:

  • capital budgeting
  • setting output prices in non-contestable markets
  • valuation.

The Handbook is not a detailed treatise on alternative methods of calculating cost of capital; such discussion is in the appendices. Where individual judgement is necessary, the Handbook seeks a practical approach; again detailed discussion of such judgements is in the appendices.




1 Introduction

2 Estimating the Cost of Capital for Value Based Reporting

  • 2.1 The basic formula and its modifications
  • 2.2 Determining each variable of the formula
    • 2.2.1 Rf - The riskless rate
    • 2.2.2 T - Marginal personal tax rate on
      interest income
    • 2.2.3ø- Tax adjusted market risk
    • 2.2.4 ßa - Asset beta
    • 2.2.5 Other variables
    • 2.3 Calculating the capital charge

3 Application to Capital Budgeting

4 Application to Setting Output Prices in Noncontestable
Product Markets

  • 4.1 Nominal or real rates
  • 4.2 Treatment of interest costs
  • 4.3 The presumed tax scenario

5 Application to Valuation

Appendix 1

  • Choosing an Appropriate Methodology

Appendix 2

  • Versions of the Private Sector Model and
    the Relevance of Leverage

Appendix 3

  • The Riskless Rate and the Market Risk

Appendix 4

  • Beta

Appendix 5

  • Choosing an Appropriate Measure of the
    Asset Base

Appendix 6

  • Comparison with the Capital Charge
    Regime for Government Departments


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