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<strong>IRG</strong>-WG RA (<str<strong>on</strong>g>07</str<strong>on</strong>g>) <strong>WACC</strong> Master Doc<br />
PIB 3:<br />
<strong>IRG</strong> acknowledges that the cost of debt can be calculated: i) using accounting data,<br />
such as the current loan book to derive the interest rate; ii) by the regulator<br />
calculating an efficient borrowing level and the associated cost of debt; iii) using the<br />
sum of the risk free rate and the appropriate company specific debt premium. These<br />
approaches should c<strong>on</strong>sider the quality and relevance of the informati<strong>on</strong> available in<br />
order to obtain an estimate as appropriate as possible.<br />
In the following graph, the relati<strong>on</strong>ship between the gearing ratio and debt premium in some<br />
<strong>IRG</strong> member states is illustrated. From finance theory it is known that an increasing debt will<br />
increase the risk and therefore the risk premium. As can be seen from the graph, benchmark<br />
data from <strong>IRG</strong> members supports this relati<strong>on</strong>ship, even though there are country-specific<br />
issues (including differences in calculati<strong>on</strong> period, maturity of the financial markets etc.)<br />
causing a large variability around a possible linear relati<strong>on</strong>ship.<br />
Debt premium (%)<br />
4,0%<br />
3,5%<br />
3,0%<br />
2,5%<br />
2,0%<br />
1,5%<br />
1,0%<br />
0,5%<br />
Gearing and debt premium in <strong>IRG</strong> countries<br />
(Fixed and mobile)<br />
0,0%<br />
0% 10% 20% 30% 40% 50% 60%<br />
Gearing (%)<br />
Source <strong>IRG</strong> Regulatory Accounting WG data collecti<strong>on</strong> (last update January 20<str<strong>on</strong>g>07</str<strong>on</strong>g>).<br />
10
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