Division The Cost of Equity Capital

The cost of equity capital is the minimum required rate of return CDL must offer to its shareholders to compensate them for:

• the time value of money;

• the risk associated with investing in CDL.

It is important to stress that the relevant rate of return is an expected future return, not a historical return. The cost of equity capital reflects the opportunity cost of investment for shareholders in companies or projects with the same (or similar) business and financial risk as the one under consideration.

In what follows, we apply a widely accepted method of estimating the cost of equity capital, namely the Capital Asset Pricing Model (CAPM):

Where:

• K_e the cost of equity capital, expressed in %;

• R_f is the risk-free rate, expressed in %;

• (R_m – R_f) is the market risk premium, expressed in %;

• β is the ‘Beta’, a measure of the systematic (non-diversifiable) risk associated with CDL’s stock, which reflects both the business and financial risk.

For the risk-free rate, market practice suggests taking the long-term (typically 10-year) government bond rate in the country of operations.

For the market risk premium, one should take the historical market risk premium over a reasonably long time period. It is common market practice to take the difference between the historical return on a diversified equity index in the country of operations, and the risk-free rate.