Hye again, i will shorten my question, how do we calculate cost of equity especially Beta for the companies/projects that have guaranteed income for 25 years from the government?
Stacey Warren - Expert brainly.com
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Well if the income is literally guaranteed by the U.S. government, then the beta is 0 and your discount rate is the U.S. Treasury Rate 20-30 year treasury bond, or technically the Treasury Spot rate curve for each respective yearly cash flow (i.e. 1 year spot rate for first year cash flow, 2 year spot rate for 2 year cash flow, etc, etc.). Assuming the corporation doesn't have any financial or other operating risk (i.e. if your company literally has a guaranteed royalty from the U.S. government). If you company has a contract with the U.S. government and other forms of business risk, however, then the situation could be more complicated. What type of business is it?
Its a privatisation where the clients recieve the unitary payments from govt evry year. But one things i'm not so sure, if the govt imposed a fixed payment, then how bout the volatily of market price of those products? Is a risk that needs to take into consideration. Thus, what is a prefereable cost of equity for this company?
Could you be a little more specific on this "privatization." What is the government "privatizing." Is this a government contract? Did the government purchase something from your clients and has promised to pay them over time. I need more terms on the deal to give you an estimate of risk. It sounds like you may have product pricing risk. What exactly are we trying to value? A simple payment? It's very unclear.
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its a Public Private Partnerships where govt will transfer all the risk to the public to finance and maintain public infrastructure. In exchange the govt will pay some sort of fixed payment every year for the services provided by clients. The risk for private company is the volatility of the price where they will inccur loss when the market price is higher (they still receive fixed price) and when the costs of services is increasing (the revenue is fixed).
sorry the govt will transfer all the risk to private not public
This situation sounds like you are trying to value a normal operating business with a firm-fixed price contract with the government. If this is the case, then the business is subject to normal business risk (i.e. operating risk, financial risk, company specific risk, etc.) and the cost of capital should be estimated in the normal fashion. Assuming that you are valuing the profit stream of the business, as opposed to just the revenue stream of the contract, you have several options: (a) proxy the risk of a government contract by examining the beta risk defense contractor's or other businesses dependent on government contract work. You may need to add additional risk premium depending upon the unique facts of your company, however. Alternatively, you could internally measure a beta for your business using subjective probabilities. For example, you could arbitrarily define three scenarios: normal, good, and bad. The revenue in each scenario is fixed, yet the costs will fluctuate depending on certain factors. Based upon your internal costs estimates in each of these scenarios determine profit. Apply a subjective probability to each scenario. Compute the probability weighted standard deviation. Develops return estimates for a market proxy in each scenario. Computer the probability weighted standard deviation and correlation. Compute a beta based upon the standard deviations, covariances, and correlations. Estimate the risk premium using the beta (assuming the investor is diversified). This is the best I can do given the data. There may be other facts and circumstances to this case that make my suggests more or less applicable. Use judgement.
I find this is useful but the problem is:-
1st Method, proxy the risk of a government contract by examining the beta risk defense contractor's or other businesses dependent on government contract work.
Usually, all data pertaining to govt contract is very difficult to get than overall biz of the company.
2nd method, Computer the probability weighted standard deviation and correlation. Compute a beta based upon the standard deviations, covariances, and correlations.
I dont quite understand, did you mean we must use accounting Beta? What data needs to regress to get Beta, correlation and covariance?