Cost of Capital

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.

Introduction

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.