Internal consistency of risk free rate and MRP in the CAPM

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Table of Figures Figure 1: Time series for yields on 10 year CGS ................................................................ 4 Figure 2: AER cost of equity decisions for regulated energy businesses ............................ 5 Figure 3: Spread between 10 year state government debt and 10 year CGS ................... 11 Figure 4: Spread between AAA corporate bonds and CGS at 4 years (the longest maturity for the Bloomberg AAA curve) ............................................................................ 12 Figure 5: Spreads between AAA and BBB benchmark bond yields at 1 year maturity ...... 13 Figure 6: Estimates of spreads on AA, A and BBB corporate bonds ................................ 15 Figure 7: Dividend yield on the ASX vs. 10 year CGS yields ............................................ 16 Figure 8: AMP method estimate of RoE and MRP relative to 10 year CGS yields ............ 18 Figure 9: Semi-governments bond pricing ........................................................................ 22 Figure 10: 10 year risk premiums on state government debt against 10 year yields on CGS ............................................................................................................................ 24 Figure 11: Risk premiums on listed equities (AMP method) vs 10 year yields on CGS ..... 26 Figure 12: Total cost of equity (AMP method) .................................................................. 27 Figure 13: US regulatory decisions over time – broken into risk free rate and risk premium ........................................................................................................................... 37 Figure 14: US regulatory return on equity decisions over 20 years – average per year .................................................................................................................................. 38 Competition Economists Group www.CEG-AP.COM
Table of Tables Table 1: AAA to BBB spreads at 1 year maturity 14 Table 2: DGM cost of equity analysis - with dividend growth rates assumptions 19 Table 3: Cost of equity estimates 34 Table 4: Summary of results from each methodology 48 Competition Economists Group www.CEG-AP.COM
Page 1 and 2: Internal consistency of risk free r
Page 3: 7.2. Methodology ii) 43 7.3. Method
Page 7 and 8: (or higher) equity premium, thus le
Page 9 and 10: Total cost of equity (AMP method) S
Page 11 and 12: 19. Material increases in demand fo
Page 13 and 14: Conclusion 23. I consider that the
Page 15 and 16: 24(5) A reference tariff should all
Page 17 and 18: 2. Movements in the risk free rate
Page 19 and 20: � sets the market risk premium pr
Page 21 and 22: In fact, we know from earlier studi
Page 23 and 24: 4. Movements in the risk free rate
Page 25 and 26: Figure 4: Spread between AAA corpor
Page 27 and 28: Table 1: AAA to BBB spreads at 1 ye
Page 29 and 30: 64. It is also common practice to u
Page 31 and 32: Figure 8: AMP method estimate of Ro
Page 33 and 34: 5. Why required returns on riskier
Page 35 and 36: iii. Indeed, the increase in risk p
Page 37 and 38: Figure 10: 10 year risk premiums on
Page 39 and 40: Figure 11: Risk premiums on listed
Page 41 and 42: ating one notch to the equivalent o
Page 43 and 44: Reserve Bank assistant governor Guy
Page 45 and 46: While at times like the present, li
Page 47 and 48: … The Tribunal considers that an
Page 49 and 50: 134. The market level of the ILG’
Page 51 and 52: Figure 14: US regulatory return on
Page 53 and 54: 2005. This amended measurement peri
Page 55 and 56:
conditions. One can test this presu
Page 57 and 58:
firms in order to arrive at an esti
Page 59 and 60:
171. Combining my best estimate of
Page 61 and 62:
Table 4: Summary of results from ea
Page 63 and 64:
Appendix A. Assumptions used in DGM
Page 65 and 66:
Tom Hird is a founding Director of
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Internal consistency of risk free rate and MRP in the CAPM

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