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Title: The cost of capital relevance for the price-capped privatized monopolies
Author: Ali, Syed Mubashir
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 1995
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The aim of my research is to determine the appropriate cost of capital of privatized and regulated price-capped utilities. The monopoly status of the utilities meant that the privatization model suffered from a market failure. The proposed remedy was regulation. Hence, the estimation of the market determined rate of return needs to incorporate the total risk faced by a regulated company. This research provides a frame-work which can be used to "operationalize" the theory of privatization and to consider the impact of regulation on firm's risk, cost of capital and value. A fundamental issue in the theory of finance is valuation of the firm and, hence what determines the risk of the firm and how its cost of capital should be estimated. Following privatization, stock prices should be used to determine the company specific rates of return. It is shown here that the traditional valuation models, the dividend growth model and the capital asset pricing model, although utilizing capital market data, ignore the effect of regulatory policy and the impact of regulation on a firm's risk and are, therefore, conceptually deficient. This research presents a stochastic consistent and deterministic model of regulation under uncertainty which captures the dynamic impact of regulation on the risk and value of the UK privatized water monopolies. A probability cash flow model of the water companies utilising risk analysis techniques is developed to consider the impact of privatization on the water industry. The models are then applied to determine the appropriate cost of capital, thereby explicitly incorporating the dynamic impact of regulation on a firm's risk and value. Under present conditions for the companies in the water industry, the dividend growth model yields an average real cost of capital of 7.71 % but the capital asset pricing model yields 12.25%. The new consistent model used in this thesis shows that under stochastic regulation the estimated implied cost of capital is 9.27% but that, under the current regulatory framework in the industry, the average implied cost of capital based on deterministic regulation is reduced to 5.34%. In other words, the cost of capital estimated using the consistent model is shown to be lower than those obtained from the standard financial models. 9
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available