A Study on input variables of valuation model for investment decision-making

Abstract

Financial assumptions in analyzing the profitability of investment projects carried out by public enterprises are easy to be subjective despite the national and social influence that public projects have. In addition, due to the characteristics of public enterprises that are not generally listed on the exchange market, it is difficult to secure market data such as beta, which indicates systematic risk, when determining the cost of capital. To resolve the problem that the profitability of a project may vary depending on this estimation method and suggest a more reliable beta range that can be applied to the water industry, we studied cases of global water companies regulated by water rates and government agencies. In this study, companies in the regulated water production and supply industry listed on the UK and US markets were selected as potential peer groups. The final peer groups were selected by reviewing the liquidity of stocks and the proportion of sales in the regulated water sector. By applying the beta of the selected peer group and the capital structure of K-water, a public water company in Korea, finally, the appropriate range of beta that can be applied to the water industry was derived.