Introduction
6.1 This Chapter examines the second aspect relating to return on
capital: weighted average cost of capital (WACC). WACC is relevant
for determining prices and for assessing performance. It is the
element of the pricing models that allows for a required rate of
return to be earned by debt and equity security providers. As well
as being compensated for bearing the entity's capital costs,
operating and maintenance expenditure, and taxes, capital providers
earn a rate of return that reflects what they could be earning by
committing their funds to an alternative project of similar risk -
their opportunity cost of capital.187
6.2 The Airport Authorities Amendment Act does not provide any
guidance as to how airports should determine WACC.188
However, guidance is provided by economic and financial theory.
6.3 In formulating its views expressed on WACC in this Report,
the Commission has obtained independent advice from Dr Martin Lally.
A copy of his final report to the Commission is included in Appendix
18 to this Report.
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