The Application of Build-up Approach in Cost of Equity Calculation of Mining Enterprises

Cost of equity calculation is a complex problem in corporate finance management. In practice such calculation is most often based on CAPM (Capital Asset Pricing Model), however, world literature and experience of developed countries indicate a possibility to use many derivatives of this method as well as new alternative methods, among which Build-up Approach is worth analyzing. Similarly to CAPM method, a starting point of this method is to determine a risk-free discount rate. Next, as in CAPM method, there is risk premium calculated. The other steps are different in Build-up Approach from CAPM, and they consists in making adjustments for specific risk factors related to a particular enterprise. In the hereby paper there is an attempt made to implement the Build-up Approach in cost of capital calculation in the Polish mining enterprises. These are specific enterprises that require high capital outlays and are characterized by a high immobilization of assets. Considering their role in the energy policy of particular countries, it often happens that they are less determined by legal regulations and co-financing by public capital. Additionally, the largest enterprises in the mining industry are listed on stock exchange, what makes it difficult to estimate their cost of equity using classical CAPM.