Public utility cost of capital models: an examination of assumptions

George W. Gallinger, Glenn V. Henderson

Research output: Contribution to journalArticlepeer-review

Abstract

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.

Original languageEnglish (US)
Pages (from-to)177-184
Number of pages8
JournalEngineering Economist
Volume34
Issue number3
DOIs
StatePublished - Jan 1 1989

ASJC Scopus subject areas

  • Education
  • Economics and Econometrics
  • Engineering(all)

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