The controversy chat exists in rate-hearing cases can be partially attributed to participants assuming theoretical compatibility between various cost of capital models, when in fact, equivalence assumptions are unsupportable. Using the traditional model, the capital asset pricing model, and the Modigliani and Miller cost of capital model, the authors show equivalency exists only under certain conditions of no change in business risk and financial risk. Unless these conditions hold, the cost of capital calculated using any of these three models is wrong. The authors derive a generalized cost of capital model.
ASJC Scopus subject areas
- Economics and Econometrics