Legal Definitions - cost-of-capital method

The cost-of-capital method is a way to calculate the cost of obtaining debt and equity capital for a utility company. This method is often used by regulatory commissions to determine a fair rate of return for the investors of the utility company.

Let's say a utility company needs to raise $1 million to fund a new project. They can obtain this capital by issuing bonds or selling stocks. The cost-of-capital method would be used to calculate the cost of obtaining this capital. The method takes into account the interest rate on the bonds or the dividend yield on the stocks, as well as the risk associated with the investment. The regulatory commission would then use this information to determine a fair rate of return for the investors.

Another example would be if a utility company wants to expand its operations by acquiring another company. The cost-of-capital method would be used to calculate the cost of obtaining the necessary capital to make the acquisition. This would help the regulatory commission determine a fair rate of return for the investors.

In summary, the cost-of-capital method is a way to measure the cost of obtaining debt and equity capital for a utility company. It is used by regulatory commissions to determine a fair rate of return for the investors of the company.