Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy
This article estimates the weighted average cost of capital (WACC) for the energy sector in Ecuador, a country with a dollarized economy and illiquid stock markets. Thus, reference companies in the region were taken, and at the same time combined with characteristics of national companies, establish...
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| Format: | Article |
| Language: | English |
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MDPI AG
2024-09-01
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| Series: | Energies |
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| Online Access: | https://www.mdpi.com/1996-1073/17/19/4782 |
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| author | Victor Aguilar Freddy Naula Fanny Cabrera |
| author_facet | Victor Aguilar Freddy Naula Fanny Cabrera |
| author_sort | Victor Aguilar |
| collection | DOAJ |
| description | This article estimates the weighted average cost of capital (WACC) for the energy sector in Ecuador, a country with a dollarized economy and illiquid stock markets. Thus, reference companies in the region were taken, and at the same time combined with characteristics of national companies, establishing a useful methodology, which makes sense with the acceptable discount rates in the Ecuadorian economy. For the above, four estimation alternatives were used. In method one, the traditional WACC formula was applied using interest rates and risk premiums from the U.S. market, which resulted in an overestimation due to the double penalty of the country risk and the U.S. market premium. Method two adjusted the market risk premium to consider only the Ecuador-specific risk premium, thus avoiding the double penalty. In method three, the credit default swap (CDS) was used to calculate the country risk premium, and the CDS was excluded from the nominal interest rate, avoiding redundancies. Finally, method four combined the U.S. interest rate with the CDS directly to calculate the market risk premium, more accurately reflecting local economic conditions in a dollarized economy. The WACC results range from 12.63% to 29.70%. In addition, a dummy variable was controlled for during the pandemic period. This article highlights the need for methodologies adapted to emerging markets, since traditional approaches would overestimate the WACC. |
| format | Article |
| id | doaj-art-2d74352dfec54ce2b66f1c8cf3557f7b |
| institution | OA Journals |
| issn | 1996-1073 |
| language | English |
| publishDate | 2024-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Energies |
| spelling | doaj-art-2d74352dfec54ce2b66f1c8cf3557f7b2025-08-20T01:47:42ZengMDPI AGEnergies1996-10732024-09-011719478210.3390/en17194782Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized EconomyVictor Aguilar0Freddy Naula1Fanny Cabrera2Facultad de Ciencias Económicas y Administrativas, Universidad de Cuenca, Cuenca 010107, EcuadorFacultad de Ciencias Económicas y Administrativas, Universidad de Cuenca, Cuenca 010107, EcuadorFacultad de Ciencias Económicas y Administrativas, Universidad de Cuenca, Cuenca 010107, EcuadorThis article estimates the weighted average cost of capital (WACC) for the energy sector in Ecuador, a country with a dollarized economy and illiquid stock markets. Thus, reference companies in the region were taken, and at the same time combined with characteristics of national companies, establishing a useful methodology, which makes sense with the acceptable discount rates in the Ecuadorian economy. For the above, four estimation alternatives were used. In method one, the traditional WACC formula was applied using interest rates and risk premiums from the U.S. market, which resulted in an overestimation due to the double penalty of the country risk and the U.S. market premium. Method two adjusted the market risk premium to consider only the Ecuador-specific risk premium, thus avoiding the double penalty. In method three, the credit default swap (CDS) was used to calculate the country risk premium, and the CDS was excluded from the nominal interest rate, avoiding redundancies. Finally, method four combined the U.S. interest rate with the CDS directly to calculate the market risk premium, more accurately reflecting local economic conditions in a dollarized economy. The WACC results range from 12.63% to 29.70%. In addition, a dummy variable was controlled for during the pandemic period. This article highlights the need for methodologies adapted to emerging markets, since traditional approaches would overestimate the WACC.https://www.mdpi.com/1996-1073/17/19/4782WACCemerging marketsenergy sectorEcuador |
| spellingShingle | Victor Aguilar Freddy Naula Fanny Cabrera Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy Energies WACC emerging markets energy sector Ecuador |
| title | Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy |
| title_full | Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy |
| title_fullStr | Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy |
| title_full_unstemmed | Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy |
| title_short | Cost of Capital in the Energy Sector, in Emerging Markets, the Case of a Dollarized Economy |
| title_sort | cost of capital in the energy sector in emerging markets the case of a dollarized economy |
| topic | WACC emerging markets energy sector Ecuador |
| url | https://www.mdpi.com/1996-1073/17/19/4782 |
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