A Case for using a Real Asset Transaction Approach for Estimating the Cost of Capital from Rural Telephone Company Data

This paper develops a real asset transaction approach for estimating the cost of capital for rural telephone companies whose financial assets are not publicly traded. The transaction approach uses the actual purchase prices of rural local exchange carriers (RLECs)’ properties and cash flows for esti...

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Bibliographic Details
Published in:The Journal of business and economic studies (Fairfield, Conn.) Conn.), 2018-01, Vol.22 (1), p.5-16
Main Author: Glass, Victor
Format: Article
Language:English
Subjects:
Cash flow forecasting
Competition
Customer services
Debt financing
Discounted cash flow
Equity
Estimates
Interest rates
Investments
Methods
Prices
Risk premiums
Rural areas
Sales
Universal service
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Summary:This paper develops a real asset transaction approach for estimating the cost of capital for rural telephone companies whose financial assets are not publicly traded. The transaction approach uses the actual purchase prices of rural local exchange carriers (RLECs)’ properties and cash flows for estimating the rate of return required by buyers and sellers of RLEC properties. The transaction approach produces higher cost of capital estimates than a traditional approach using a weighted average of debt and equity costs of proxy companies traded on organized exchanges. The estimated difference is in line with the risk premium estimated for small non-traded companies estimated by Duff and Phelps Ibbotson.
ISSN:1063-343X
2576-3458
DOI:10.53462/ZAWJ3757