Calculating Cost of Capital

Cost of Capital Peter KLUNE Dubai, 29 th October 2007

Agenda ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

A little bit of theory ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Relevance of cost of capital marketing sales costs customer care RT-billing depreciation operating costs, etc. production costs network infrastructure Retail-Product WS-Billing, administration depreciation operating costs, etc. Wholesale-Product Cost of capital ~ 10-20% Cost of capital ~ 15-25% Cost of capital plays a substantial role in the determination of network costs

The WACC formula ,[object Object],[object Object],[object Object],[object Object],[object Object],r f risk free interest rate β Beta (systematic risk factor) r m interest rate of market portfolio (r m – r f ) equity risk premium equity ratio dept ratio weighted cost of equity weighted cost of dept r d company specific dept rate (r d – r f ) company specific dept premium

1. Risk free interest rate ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Historic/average versus current yields 4,6 % Average over 8 years 3,9 % Approach of Austrian NRA regarding mobile termination fee calculation average over 3 years Minimum: 3,2 % Maximum: 5,9 %

2. Beta factor (1/2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

2. Beta factor (2/2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],* See: Damodaran: „Investment Philosophies” Deviation between minimum and maximum value (30.06-30.09.2007)

Alternative way of beta estimation ,[object Object],[object Object],[object Object],[object Object],[object Object],* see: Blume, M.E.: Betas and their regression tendencies, Journal of Finance ** see: Bloomberg Guidelines to adjusted beta estimates

3. The risk premium (1/2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

3. The risk premium (2/2) ,[object Object],[object Object],Source: IRG, Regulatory Accounting Workgroup data collection (last update January 2007) The average value is 5,3%

4. Cost of dept (1/2) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

4. Cost of dept (2/2) ,[object Object],[object Object],[object Object],Source: IRG, Regulatory Accounting Workgroup data collection (last update January 2007)

5. Capital Structure / gearing ratio ,[object Object],[object Object],[object Object],[object Object],[object Object],Example: Target Capital Structure of Telekom Austria

6. Tax rate ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Main driver of WACC calculation ,[object Object],[object Object],1 2 3 5 4

Two types of reference base ,[object Object],Example: Purchase value: 300 Mio. Dirham Useful life: 15 years WACC: 10% Cost of capital in total: 225 Mio. Dirham

The divisional cost of capital ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

International benchmarks (wireline) Source: Cullen International

International benchmarks cont. Approx. 20% mark-up

Summary ,[object Object],[object Object],[object Object],[object Object],[object Object]

Thank you for your time Questions? Peter KLUNE Regulatory Affairs TELEKOM AUSTRIA AG Lassallestraße 9 A-1020 Austria › E-Mail [email_address]  Phone +43 (0)59059 1 16012   Fax +43 (0)59059 91 16012   Mobile +43 (0)664 629 61 76

Appendix: helpful links and related documents ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Calculation with nominal versus real values ,[object Object],[object Object],[object Object],[object Object],[object Object]

Calculating Cost of Capital

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