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Published: 2/9/2014. Updated: 7/31/2017

Rate of return on investments (WACC)


RATE OF RETURN ON INVESTMENTS (WACC)

 

The WACC is calculated by taking into consideration the weighted price of using the equity capital and the debt capital, without taking into account the effect of taxation (i.e. the WACC value is higher than that with the taxation effect taken into consideration and represents the pre-tax cost of the capital), by using the following formula:

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To calculate the rate of return on investments, the data provided in Table 1 were used, which are applied in setting the ceilings of the natural gas prices to the natural gas  and centralized supply of liquefied petroleum gas undertakings in 2018–2022

Table 1. Data  used to calculate the rate of return on investments

RatioValue    Source/link
Cap of cost of debt (interest rate), percent, Rd2,05The average interest rate  during the most recent twelve-month period of long-term loans given to non-financial corporations, as announced by the Bank of Lithuania.
Premium on cost of debt Half of difference between the cap of cost of capital and actual cost of capital of individual company.
 Return on equity, percent, Re
Share of debt capital (optimal capital structure),  D0,6
 Share of equity  capital (optimal capital structure), E0,4
 Tax rate, m0,15The income tax rate applied in Lithuania.
Risk-free rate of return on investments (in percent), Rf2,64The arithmetic mean of the average weighted profitability of the auctions of the Government bonds  denominated in Litas (till December 31,2014) and Euros (from January 1, 2015) with the maturity period of no less than 3468 days), held during the recent ten-year period.
Equity risk premium , Rerp4,88

The sum of the equity risk premium of the country with the developed capital market (the US) and the additional market risk premium of Lithuania (last 20 years). 

US equity risk premium is defined as difference between the return on investments (in percent) in the US securities market during a last twenty years,  and the rate of return on the US treasury bonds with a ten-year maturity, on the basis of the S&P 500 index announced by the rating agency  Standard&Poor's  and the data of the US treasury bonds announced by the bank of the US Federal Reserve System.  

The additional market risk premium of Lithuania is determined as the difference between the risk ratio (in percent) corresponding to the credit rating of Lithuania and the risk ratio (in percent) corresponding to the US credit rating, on the basis of the data on prof.  A. Damodaran website.

Beta coefficient (levered β)

- for natural gas undertakings, engaging in transmission, liquefaction, storage;

- for setting tariffs for biogas plants, which supplies gas to natural gas system

0,73On the basis of the Report on the investment conditions in the EU member states published by the Council of European Energy Regulators (CEER), the arithmetic mean of the risk ratio in the natural gas transmission sector of the European Union member states
- for undertakings, engaging in natural gas distribution and in centralized supply of liquefied petroleum gas0,73On the basis of the Report on the investment conditions in the EU member states published by the Council of European Energy Regulators (CEER), the arithmetic mean of the risk ratio in the natural gas distribution  sector of the European Union member states
Actual weighted average cost of debt capital in natural gas sector  0,70