Dilemmas of Equity Cost Calculation in Polish Mining Enterprises

Transcription

1 Journal of US-China Public Administration, ISSN September 2012, Vol. 9, No. 9, D DAVID PUBLISHING Dilemmas of Equity Cost Calculation in Polish Mining Enterprises Aneta Michalak Silesian University of Technology, Zabrze, Poland The purpose of the paper is to present the methods of equity capital cost calculation and the attempt is made to implement them in the conditions of unstable environment of the Polish mining enterprises performance. In the theory of finance, there are many methods of equity cost calculation functioning, however, there are also many controversies and difficulties attached. The author conducts the analysis of possibility to use the following methods in estimating the cost of capital: CAPM (Capital Asset Pricing Model), APM (Arbitrage Pricing Model), DGM (Dividend Growth Model), DCF (Discounted Cash Flow), three-factor pricing model (Fama-French Model), BPM (Butler-Pinkerton Model), and Build-up Approach. The implementation of the common concepts of equity cost calculation in specificity of mining enterprises is a new approach in finance management of mining enterprises. The research results shall find their use in the effectiveness account and value pricing of mining enterprises, planning capital structure and other circumstances of mining activity. Introducing some known methods of equity cost calculations is not always possible on the grounds of mining enterprises. The research results constitute an extension in finance theory of mining enterprises regarding problems of adjusting equity cost calculation methods to the specific conditions in which mining enterprises perform. Keywords: cost of equity capital, mining enterprises, CAPM, dividend model Specificity of Activity of Polish Mining Enterprises Since the beginning of 1990s, in the mining industry there have been restructuring processes conducted which mostly aimed at improvement of the effectiveness of coal mines functioning as well as adjusting them to the conditions of free-market economy. At the beginning of 1990s, in Poland there were 70 mines operating state-owned enterprises. In the sector, there was an over-production of hard coal, being the result of demand decrease in the domestic market (Jonek-Kowalska, 2011b). In 2011, there were 29 hard coal mines operating in the industry, grouped in five mining enterprises. Coal extraction is decreasing systematically year by year and the coal production costs are constantly increasing. A specific feature of mining activity is functioning in a situation which would be called as a crisis one in another industry. Most of the mining enterprises, in their structures of financing sources, mainly base on external capital. Their capital structures break most of financing rules. For example, in one of the biggest mining enterprises, equity does not exceed the level of 20 percent of liabilities, which implies the lack of The paper was elaborated in frames of the project financed by the sources of National Science Centre for years of Corresponding author: Aneta Michalak, Ph.D., lecturer, Institute of Economy and Computer Science, Faculty of Organization and Management, Silesian University of Technology; research fields: cost of capital, corporate finances and management, public administration, risk in organization. michalak.aneta@interia.pl.

2 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES 1009 compliance with the golden balance-sheet rule. The company, operating in such conditions, is faced with a very high financial risk as it does not fulfill the general rules set for debt security. The debt level of equity capital also proves a very high financial risk. In most enterprises, the payables and reserves for payables are exceeding the value of equity capital by the number of times. This financial pathology is deteriorated by the fact that, among external capitals, there are short-term payables dominating. In the conditions of market economy, in case of companies outside the mining industry, such financial structure is not encountered. It disables the proper function of a company. Additionally, attention should be paid to the fact that mining enterprises, due to the profile of their performance, are specific for a high immobilization of assets of a high value which, in a big part, are practically impossible to cash (buildings and objects of underground engineering, working pits, professional mining machines, etc.). A considerable part of these assets is financed by external capital in mining enterprises, and this phenomenon raises even more concern if it is a short-term external capital. The current situation of mining enterprises is not typical for market conditions. In a big degree, they were affected by previous social-political conditions. However, everything indicates that this situation is going to change in a short period of time. There was a privatization process initiated in this sector. Therefore, the subject of cost of capital should be analyzed in a market way, including the cost of equity in mining enterprises. The contemporary owner of equity capital treasury, has not been especially interested in return on equity so far (they were driven by other, mainly social premises). Having conducted literature studies, interviews and observations among the management of mining enterprises, the results show that the area of finance management, in terms of calculation of cost of equity capital, is previously neglected in mining enterprises as well as not examined in a sufficient and detailed way. Review of Methods of Cost of Equity Estimation Along With Assessment of Application Possibilities in Mining Enterprises A proper estimation of the cost of equity capital is an elementary condition for making rational investment and financial decisions. The cost of equity capital reflects a minimal return rate on invested capital expected by the owners. It is a key parameter used in the profit assessment of companies. It is also used for calculation of investment effectiveness in NPV (Net Present Value) method. It usually appears as the component of weighted average capital and determines the level of discount rate (Zarzecki, 2010). The cost of equity capital may be determined by various methods, although in Poland the most popular one is CAPM (Capital Asset Pricing Model). In countries of a stable market economy, beside CAPM method, there are the following methods often used (Diacogiannis, 1994): (1) APM (Arbitrage Pricing Model) method; (2) DCF (Discounted Cash Flow) method; (3) DGM (Dividend Growth Model) method; (4) Build-up Approach; (5) Fama-French Model; (6) BPM (Butler-Pinkerton Model); (7) Risk Premium Method. The application of the most of the aforementioned methods is connected with many difficulties, especially in case of such specific enterprises as mining enterprises. Below, there are the basic assumptions of each method presented and the possibilities of application of these methods in mining enterprises determined.

3 1010 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES CAPM CAPM (Sharpe, 1964; Lintner, 1965) is one of the most popular methods of estimating the cost of equity stemming from retained earnings (Amadi, 2010). It is a part of a larger theory called the Capital Market Theory (CMT). The basic assumption of CAPM is that the part of a risk premium on expected return rate on investment in securities is a function of the market risk of this security (Kapil, 2011). When the extent of the analysis of market relations is concerned, which leads to a certain behavior from the investors, CAPM refers to the portfolio theory (Grabowski & Pratt, 2008). In practice, valuation of the cost of equity using CAPM is based on the assumption that the return rate required by an investor is dependent on the risk-free investment rates and the risk premium specific for a given investment (Rutkowski, 2007). This assumption is passed on the relation between risk and the expected profitability of the investment (Pluta, 2000). According to the basic assumption of CAPM, the return on a single share related to the market is given by the formula (Saługa, 2006): k = r + β r r ) (1) RF ( M RF k: cost of equity stemming from retained income; r RF : required return rate on risk-free investments; r M : return rate on the investments that represent the market portfolio; β: coefficient determining the level of systematic risk (the measure of relations between the return rate realized in equity in a particular enterprise and the return rate realized on the market). The risk-free return rate (r RF ) is usually determined on the basis of profitability of treasury bills, which are considered as the safest financial instrument. In practice, in this case the interest rate of government bonds and treasury bills is being used (Hawawini & Viallet, 2011). On the other hand, the coefficient β determines the level of market risk related to investing in the assets of a given enterprise (Michalak, 2011b). This coefficient is dependent, among others, on the type of the economic activity conducted by the economic subject, the structure of its property and the source of financing. In practice, the coefficient β reflects the volatility of share prices of the given enterprise in the perspective of the volatility of the entire index. In practice, the value of the coefficient β may be determined using the following formula (Ogier, Rugman, & Spicer, 2004): ( r rm ) ( rit ri ) cov( r, r ) β (2) mt it mt t = 1 = = n var( rmt ) n β: beta coefficient; cov(r it, r mt ): covariance between the return rate on the shares of the enterprise and the return rate on the market portfolio; var(r mt ): variance of the return rate on the market portfolio; r it : rate of return on the shares of the enterprises in period t; r mt : return rate on the market portfolio in period t; r : average rate of return on the market portfolio in period t; m r : average rate of return on the shares of the enterprise t; i t: period based on which the parameters of the models are determined. t = 1 ( r mt r m ) 2

4 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES 1011 In order to determine β, at least one simple regression has to be conducted, measuring a visible, historical relation between the changes in the price of the shares of the enterprise, increased by the profits from the dividend, and the change in the prices in the securities market. Most commonly however, only the changes in the prices of the enterprises are used for comparison because taking into consideration the historic dividend may alter the result (Ogier et al., 2004). The coefficient β equaling 1 means a typical risk level, higher than 1 characterizes investments with a higher risk level and lower than 1 characterizes investments with a relatively low risk level (Melich, 2004; Mayo, 1997). By analogy, enterprises with a higher level of β are more risky than firms with a lower β (Rakow, 2010). Another element determining the cost of equity in CAPM is the expected market return rate r M. This rate is extremely hard to be precisely estimated. Most commonly, the return rate on the basic stock market index is accepted as the market return rate. Very often, in order to avoid complications in estimating r M, the total difference (r M - r RF ) is calculated which is determined as the market risk premium (MRP). It is then assumed that it is appropriate for all the actions taken in the market, as objective macro-economical factors determine it (A. Cwynar & W. Cwynar, 2003). APM APM method is an approach based on a multifactor estimation model which allows estimating the cost of equity capital. In order to do this, it uses a set of factors determining the risk of a given business. This set may be diversified and among the most commonly mentioned factors the following are mentioned: the difference of the interest rate of long- and short- term government bonds, rate of inflation, rate of sales growth in the manufacturing sector. In practice, other factors may be used as well. A formal formula of the APM model is presented in the following way (Zarzecki, 2000): k p = R f + i=1 i [ E{ R } R ] β (3) R f : risk-free discount rate; β i : risk index presenting the volatility of the returns of the given enterprises in relation to the changes of the factor i; p: number of risk factors taken into consideration in the model; [ { } ] E R i R t : market premium stemming from the risk ascribed to the i-th factor. The APM method does not have a standard character. One cannot refer to it as a universal model. The variables of the model may be adjusted to the specific conditions (of different economies, sectors, enterprise groups) and may be subjected to changes, which is a statement of a high elasticity of the APM method (Zarzecki, 2010). Taking this into consideration, one can acknowledge the APM method as an attractive method of determining the cost of equity. This causes very serious problems in practical implementation. Numerous attempts aimed at estimating the cost of equity capital by the use of this moment have not led to its more widespread implementation among the practitioners (Zarzecki, 2000). Taking into consideration an exceptionally large number of risk factors in a mining enterprise and the mutual relations between these factors, which are often hard to spot and measure, the use of this model in a mining enterprise is much more difficult. The additional obstacle is a difficult access to information concerning risk factors specific for a given mining enterprise, especially in the area of risk generated by natural and technological threats. i t

5 1012 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES DCF Another approach is the dividend model, known also as DCF. This model assumes that the benefits of the owners are the dividends rising in a constant rate of g-percent annually. According to DCF, the cost of equity is dependent on: the size of the historical dividend paid in the base period, a constant rate of dividend growth and the current share price (Sierpińska & Jachna, 2007): d k = 1 + g (4) P o d 1 : the value of the yearly dividend per one ordinary share in the next period; P o : the current share price of ordinary share; g: constant annual growth rate of dividend. According to the above, in this model it is assumed that the cost of equity is expressed by the rate of dividend increased by its constant rate of growth. DGM DGM method is an approach based on the estimation of future dividend and its rate of growth. This model is the result of a transformation of the discounted dividend model with a constant rate of return (Zarzecki, 2010). The cost of equity is determined by the relation of the expected dividend in the following year and the current share price, increased by the constant dividend growth rate. According to this method, the cost of equity may be presented as following (Alexander, 1995): DIV1 k = + g c (5) K DIV 1 : global value of the dividends in the following year; K 0 : current market value of equity; g c : growth rate of dividend. Currently, this model is used relatively rarely, as it seems that its use is restricted basically for enterprises that are characterized by a stable growth. Mining enterprises do not meet this condition. The majority of them are not listed on the stock exchange. There is also no practice of paying regular dividend. Therefore, the use of this method in case of mining enterprises does not provide appropriate results. Build-up Approach Build-up Approach is a method based on adding separate parts of risk which are included in the discount rate in a particular company. Risk factors, added to each other, indicate a total return that may be expected by a rational investor on a purchase of this company. The method is mostly used for pricing smaller companies that are not publicly traded. A starting point in this method, analogically to CAPM, is determining risk-free discount rate which is usually adopted from the interest rate of long-term state securities. Next, similarly to CAPM, the risk premium is determined. Further steps distinguish this method from CAPM, as one should make corrections based on the specific risk factors regarding a particular company. As the method described is dedicated to small firms mainly that are considered to be more risky than medium and large companies, the first correction regards additional premium for the size. Then, there are other risk factors indicated, based on a subjective analyst s assessment, e.g., industry, financial risk determined by the basic financial ratios specific for a company, degree 0

6 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES 1013 of activity diversification, variety of sale markets, modernity of production techniques used, management competence, power and activeness of trade unions, etc. (Zarzecki, 2000). Having completed all the corrections, the cost of equity capital is received for the particular company. As it was mentioned before, build-up method is advisable for small firms. Mining enterprises cannot be assigned to them as adjusting this method to the specificity of their performance is a problem. The application of this method is possible but raises many difficulties connected with the scale of these enterprises activity and very big number of risk factors that accompany their operation. Moreover, a great number of risk factors are hard to measure and are treated by the analysts dealing with these problems in a qualitative way by assigning conventional ranks to certain kinds of risk, instead of defining it by the calculus of probability (Michalak, 2011a; Jonek-Kowalska, 2011a). Fama-French Model Fama-French Model is a three-factor model of equity capital pricing. It is a linear regression model in which the cost of equity is estimated on the basis of time series regarding separate enterprises. Dependent variable is a monthly surplus of returns on shares of a particular company over the return on treasury bills. There are some dependant variables, e.g. (Zarzecki, 2010): (1) Surplus of monthly return on the market over the return on treasury bills; (2) Difference between monthly return on enterprises of a low capitalization and the return on enterprises of a high capitalization; (3) Difference between monthly return on enterprises of a high book/market ratio and the return on enterprises of a low ratio. The supporters of this model state that the factors composing it reflect an additional, undiversified risk, not included in the beta coefficient in the standard CAPM (Zarzecki, 2010). BPM BPM is a one-factor pricing model with the use of total beta that includes a total risk of an enterprise, which is a systematic and specific risk. The basic assumption of this model bases on a theorem that the classic (standard) beta, which measures systematic (market) risk, does not consist of a complete risk connected with public as well as private enterprises. In order to mitigate this imperfection, BPM introduces a concept of total beta (Zarzecki, 2010). Total beta is a standard deviation of return rate on shares of a particular company divided by standard deviation of return rate on the stock market. It is an extension of a classic portfolio theory, relating to undiversified investments. The estimation of cost of equity capital in BPM model is presented below (Von Helfenstein, 2008): Total cost of equity (TCOE) = Risk free rate + Total beta Equity risk premium (6) This method is suggested mostly for the estimation of cost of equity capital in small and medium non-public companies. Its assumption does not match the specificity of mining enterprises, which are mostly joint-stock companies of treasury, and their large sizes hinder the pricing of a specific risk. Risk Premium Method Another approach is a method of profits on bonds that involves risk premium (bond field plus risk premium). The owner, when putting his resources into the company, expects a return rate on his capital in the following formula (Turek & Jonek-Kowalska, 2009):

7 1014 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES k = r RF + r p (7) r p : risk premium. This concept bases on an alternative return rate, which in this case is presented as a sum of interest rate of long-term treasury bills and risk premium connected with investment in company s shares. The aforementioned risk premium is indicated as the difference between the market return rate (measured by, e.g., main stock index) and the return rate on long-term treasury bills corrected by risk specific for an activity of a particular company. It may also be determined arbitrarily for rising capital markets characterized by high variation of return rates of capital investments (Ciołek, 2007). Application of Selected Method of Cost of Equity Capital Calculation in a Mining Enterprise There are example calculations of cost of equity capital conducted below in a chosen mining enterprise in order to present the practical problems occurring during this process. The criterion of selecting the mining enterprise was the availability of financial data. When estimating the cost of equity capital in a mining enterprise, in the first turn, there was the most popular method currently used: CAPM. The estimation of cost of equity by CAPM method in a mining enterprise, similarly to other methods, is not disposed of difficulties. In case of CAPM, the most difficulties appear in the area of indication of β coefficient. It mostly stems from the lack of participation in a public trade of most mining enterprises. The examined mining enterprise X single joint-stock of treasury, is one of such companies. The privatization perspective of this company is quite remote. When determining β coefficient, the comparison was made among enterprises of the mining industry that were traded on the Polish Stock Exchange. For the calculation of the cost of equity in a mining enterprise, the period of was used. In CAPM, there were the assumptions made regarding risk-free rate, beta coefficient and risk premium. In beta coefficient calculation, it was firstly conducted on KGHM SA. It is an enterprise performing in the mining industry, listed on the Warsaw Stock Exchange. In its case, beta coefficient calculation was possible for the period of the last six years that is from 2005 to 2010, as well as to determine risk premium. The beta coefficient was also estimated for other enterprises of mining industry listed on the Warsaw Stock Exchange. However, it was not possible for them to relate to the six-year period due to the period of listings on the Warsaw Stock Exchange. Therefore, New World Resources (NWR) was used for example, as it enabled to calculate the beta coefficient in the period from half of 2008 to the end of NWR is a mining enterprise, listed on the Warsaw Stock Exchange, conducting hard coal extraction in Czech Republic and Central Europe. There was also an attempt made to estimate the beta coefficient for Lubelski Węgiel Bogdanka SA which has been listed on the Warsaw Stock Exchange since the half of A methodology of beta coefficient calculation for the aforementioned enterprises is as follows: (1) Gathering data at the level and change of quotations of KGHM, NWR, Lubelski Węgiel Bogdanka SA, and Warsaw Stock Index (Warszawski Indeks Giełdowy [WIG] was adapted as the market return rate) in the period of (the analysis was based on monthly data); (2) Calculating the average return rate on KGHM shares in the period of , NWR in the period of the half of 2008 to the end of 2010, and Lubelski Węgiel Bogdanka SA from the half of 2009 to the end of 2010 (data in a monthly depiction);

8 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES 1015 (3) Calculating the covariance of return rates on shares of chosen enterprises and the WIG stock index in the period of ; (4) Determining the beta coefficient for selected enterprises. According to the above, the calculations started from gathering the basic information about shares quotations of selected companies and WIG. On the basis of the analysis of stock exchange historic data, the average return rate on shares of analyzed enterprises was calculated as well as return rate on WIG in the period under analysis. The results are included in Table 1. Table 1 Average Return Rate on Shares of Analyzed Enterprises and WIG (%) Period Bogdanka NWR KGHM WIG Another stage of beta coefficient calculation is determining the covariance of return rates on the researched companies and the WIG stock index in the period of The results of calculations are presented in Table 2. Table 2 Covariance of Return Rates on Shares of Analyzed Enterprises and WIG (%) Period Bogdanka NWR KGHM WIG After including all presented stages, the beta coefficient may be calculated. The calculation results are shown in Table 3. Table 3 Beta Coefficient for Analyzed Enterprises and WIG Period Bogdanka NWR KGHM In the next stage, the value of risk premium was indicated. It is the difference between the market return rate (WIG) and the risk-free rate estimated on the basis of an average yearly profitability of 52-week treasury bills in years of The calculations are included in Table 4. In the analyzed period, the negative values of risk premium appeared. Market return rate on WIG stock index was lower than the risk-free rate in the all examined years. On the basis of the calculations above, the cost of equity capital was determined in years of It was estimated as multiplication of beta coefficient by the value of risk premium and to the result obtained the value of risk-free rate was added. The beta coefficient was calculated for three enterprises of mining industry. After conducting the analysis of results, it was assumed that the results received cannot be averaged because of

9 1016 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES too big discrepancies between them. The beta coefficient calculated for Lubelski Węgiel Bogdanka differs from two other companies. It may be disfigured by single discrepancies of return rates on shares and on WIG, due to a short period of quotations (from the half of 2009). In relation to this, it was not used in further calculations. NWR has been listed on the Warsaw Stock Exchange since 2008; the beta coefficient estimated for this enterprise in period of is at the level of In the same period, beta coefficient calculated for KGHM equals Following the rule of caution, for the purpose of cost of equity capital calculation by CAPM method, in enterprise X a higher beta coefficient was adapted, specific for NWR enterprise. The calculation results are included in Table 5. Table 4 Risk Premium Calculation in Years of (%) Year Market return rate Risk-free rate Risk premium Table 5 Cost of Equity Capital From Retained Profits for Enterprise X in Years of Cost of equity capital 1.46% 2.70% % 0.45% The value of the cost of equity capital is strongly differentiated in the analyzed period, which is caused by a large dispersion of beta coefficient and low value of WIG index return rate. In 2007 and 2008, there was no possibility to calculate the cost of capital using CAPM method as the calculation result was negative. In the remaining cases, also because of the negative values of risk premium, the cost of equity capital calculation, on the basis of CAPM method, cannot be considered as rational and useful for the cost of equity capital calculation. The cost of equity capital determined above appears to be several times lower than the risk-free rate. Grounding on the analysis conducted, it may be stated that, in case of such specific enterprises as mining enterprises, CAPM method is not realistic. CAPM concept proves itself only in a static environment (Amadi, 2010). Another problem, occurring in CAPM method, is beta coefficient indication in case when market price of estimated equity is not available. Fuller and Kerr (1981) proposed a technique of coefficient s proxy estimation for a particular company, basing on the analysis of book data, industrial factors and other important factors. It is not fully reliable, though. The cost of capital among similar companies, even using CAPM method, may not provide credible results (Grabowski & Pratt, 2008). In many cases, it is a big difficulty to find very similar companies in one industry, even in terms of size (Ingram & Margetis, 2010). One of the solutions suggested in the subject literature, in case when capital is not priced in the market, is the use of book data. Ball and Brown (1968), as well as Beaver, Kettler, and Scholes (1970), proved a relation between book data and beta coefficients in CAPM. So-called book betas are comparable to market proxies.

10 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES 1017 Another alternative was proposed by Gordon and Halpern (1974), building an analytic model of return rates on divisions. Their model was grounding on covariance relation between the book data of divisions (e.g., profits growth) and a diversified portfolio (e.g., market portfolio). Despite of encouraging empiric results, this model is not commonly used. In accordance with the limitations that are linked to CAPM method, in order to determine the cost of equity capital in the mining enterprise, DGM method is suggested. The examined mining enterprise X pays some of the profits gained to the treasury, however, the amount of the dividend paid is irregular, so it cannot be compared with shares market value. Therefore it was assumed that the cost of capital may be estimated by dividend method in an indirect way, as confrontation of the value of dividend paid with the value of equity capital in the period of The value of dividend paid, value of equity capital and the cost of equity capital from retained income in the mentioned period are presented in Table 6. Table 6 Value of Dividend, Equity Capital and the Cost of Equity Capital (DGM) in Enterprise X Dividend (thousand PLN) 37,199 6, ,170 0 Equity capital (thousand PLN) 1,897,715 1,513,161 1,462,726 1,416,158 1,504,021 2,497,152 Cost of equity capital (%) The results obtained by a dividend method, similarly as results obtained using CAPM method, do not provide grounds for a rational assessment of the cost of equity capital in the enterprise X. Therefore, there was another attempt made to calculate the cost of equity capital using Risk Premium Method. According to this method, the value of risk-free rate is increased by the premium value connected with risk of a particular enterprise. It is assumed that, in case of a Polish capital market, risk premium is determined as a subtraction between return rate in the market (WIG) and risk-free rate indicated by the profitability of 52-week treasury bills. The value of the premium was estimated in Table 4. As it was noticed before, in the conditions of unstable financial market, it adapted the negative values and could not constitute a base for a rational estimation of the cost of equity capital. For this reason, its arbitral value for rising markets is adapted at the level of 6.5 percent (Jonek-Kowalska, 2011b). There are calculation parameters as well as the cost of capital estimated on their basis presented in Table 7. Table 7 Cost of Equity Capital in Years of Using Risk Premium Method (%) Risk-free rate Risk premium Cost of equity capital The results provided in Table 7 may be considered as rational. However, it should be remembered that the method presented is not disposed of defects. First of all, in this method the cost of equity capital is the same for all companies from the same industry. It does not include the specificity of the company, based on general-economic data only. Moreover, the value of risk premium is assumed in an arbitral way.

11 1018 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES Conclusions On the basis of conducted analysis, it may be stated that, in case of such specific companies as mining enterprises, the implementation of common methods of the cost of equity capital calculation is not always possible. The results obtained in the particular methods are not always rational. Most models require to fulfill certain assumptions that are not realistic in mining enterprises. Many models are difficult to use for companies that are not listed in capital markets, and most mining enterprises are the partnerships belonging to the treasury in a significant part. Another barrier is the fact that mining industry does not pay dividends regularly. It limits the possibility to apply many of the presented models. References Alexander, I. (1995). Cost of capital. The application of financial models to state aid (pp ). Oxford: OXERA. Amadi, C. W. (2010). Estimation of the cost of equity: A chance of a loss approach (p. 8). Carrollton, Georgia: Richards College of Business, University of West Georgia. Ball, R., & Brown, P. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 7, Beaver, W., Kettler, P., & Scholes, M. (1970). The association between market determined and accounting determined risk measures. The Accounting Review, 45, Ciołek, M. (2007). Corporate finances in examples and exercises (p. 211). Warsaw: CeDeWu. Cwynar, A., & Cwynar, W. (2003). Value management of limited liability company. Concepts, systems, tools (p. 412). Warsaw: Foundation of Accountancy Development in Poland. Diacogiannis, G. P. (1994). Financial management: A modeling approach using spreadsheets (pp ). London: McGraw-Hill. Fuller, R., & Kerr, H. (1981). Estimating the divisional cost of capital: An analysis of the pure-play technique. Journal of Finance, 36(5), Gordon, M., & Halpern, P. (1974). Cost of capital for a division of a firm. Journal of Finance, 29, Grabowski, R. J., & Pratt, S. P. (2008). Cost of capital: Applications and examples. New Jersey: John Wiley and Sons. Hawawini, G., & Viallet, C. (2011). Finance for executives: Managing for value creation (4th ed.). Mason: South-Western Cengage Learning. Ingram, M., & Margetis, S. (2010). A practical method to estimate the cost of equity capital for a firm using cluster analysis. Managerial Finance, 36(2), Jonek-Kowalska, I. (2011a). Analysis and assessment of operational risk in mining enterprises. In M. Turek (Ed.), Models of Financing Operational Activity of Mining Enterprises (pp ). Katowice: Central Mining Institute. Jonek-Kowalska, I. (2011b). Examining the financial conditions of operational activity in chosen mining enterprises in years In M. Turek (Ed.), Models of Financing Operational Activity of Mining Enterprises (p. 133). Katowice: Central Mining Institute. Kapil, S. (2011). Financial management. India: Dorling Kinderlsey. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 47(1), Mayo, H. B. (1997). Introduction to investment (p. 193). Warsaw: K. E. Liber. Melich, M. (2004). Company value pricing. In A. Szablewski and R. Tuzimek (Eds.), Company Value Pricing and Management (pp ). Warsaw: Poltext. Michalak, A. (2011a). Analysis and assessment of financing risk of mining enterprises with the inclusion of questionnaire research. In M. Turek (Ed.), Models of Financing Operational Activity of Mining Enterprises (pp ). Katowice: Central Mining Institute. Michalak, A. (2011b). Cost of capital as a reason for choosing financing sources of operational activity. In M. Turek (Ed.), Models of Financing Operational Activity of Mining Enterprises (p. 175). Katowice: Central Mining Institute. Ogier, T., Rugman, J., & Spicer, L. (2004). The real cost of capital: A business field guide to better financial decisions. Pearson Education.

12 DILEMMAS OF EQUITY COST CALCULATION IN POLISH MINING ENTERPRISES 1019 Pluta, W. (2000). Capital budgeting (pp ). Warsaw: PWE. Rakow, K. C. (2010). The effect of management earning forecast characteristics on cost of equity capital. Advances in Accounting, Incorporating Advances in International Accounting, 26(1), Rutkowski, A. (2007). Finances management (p. 309). Warsaw: PWE. Saługa, P. (2006). Pricing of mining investment projects in the aspect of discount rate choice (p. 55). Kraków: Sigmie PAN. Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), Sierpińska, M., & Jachna, T. (2007). Methods of making financial decisions (p. 389). Warsaw: PWN. Turek, M., & Jonek-Kowalska, I. (2009). Dilemmas of equity cost accounting in a mining enterprise. Mining Review, 65(9), Von Helfenstain, S. (2008). Revisiting total beta. Business Valuation Review, 28(4), Zarzecki, D. (2000). Techniques of equity cost calculation. Company Economics and Organization, 8, Zarzecki, D. (2010). The usefulness of build-up approach in equity cost estimation. Organization Review, 2,