The Weighted Average Cost of Capital (WACC) is commonly used to assess the profitability of an investment or to value assets or companies. It is a key financial parameter in corporate decision-making. In regulated environments, such as the telco or the energy sectors, sectoral regulators set the WACC, mostly for cost-oriented products, and it is an important component of the pricing of such products. It is hence of utmost importance that WACC values used by the regulators are set at an appropriate level to provide the right incentives for regulated entities and their competitors, and more broadly for the consumers.
The monetary policies implemented by the European Central Bank (ECB), and in particular its Quantitative Easing (QE) programs, have led to persistently low or even negative interest rates in several countries, challenging common empirical approaches to estimate the WACC and potentially entailing high risks of misaligned or under-estimated WACC values. The main issue that QE raises for the regulators is whether the fall in government bond yields that it has caused, reflects the fall in the return that equity investors require, and whether the regulators should make an upward adjustment to the observed yields.
The objective of the Seminar is to explore concrete theoretical and empirical questions related to WACC in regulated environments and to gather views from a diverse set of stakeholders that include European institutions, academia, regulators, companies, and financial analysts.
The Seminar, divided into two parts, focuses first on the methodological issues concerning the setting of WACC in the telecoms sector, and second on potential challenges to its application in the future.
The Seminar will address the following questions in particular:
What are the implications of QE on theoretical and empirical approaches to WACC setting?
Is there a need to change common approaches of WACC setting?
What are the risks of misaligned values with market estimates?
What are the implications of:
· A possible end to QE
· The revival of inflation
· Other issues (energy shock, supply chain changes, etc…)