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By Rangi Reddy, Krishna Reddy and Palmerston North


The capital charge régime was introduced in New Zealand government departments in July 1991. The régime provides a mechanism for the Crown to require a return on the funds invested in New Zealand (hereafter NZ) government departments. However the current models used to determine the required rate of return (hereafter the capital charge) from departments are private sector models. Therefore, the capital charge required by the Crown will be substantially higher than what departments are able to generate. This study focuses on the models suggested by The Treasury, that is, the Capital Asset Pricing Model (CAPM) and Weighted Average Cost of Capital (WACC)) to determine the capital charge. A document study, literature survey and semi-structured interviews were conducted to determine a model which will reduce or eliminate the problems associated with the current models used to calculate the capital charge rate for government departments in New Zealand. In order to do this the study ascertained and evaluated the current models used to calculate the capital charge rate applied to New Zealand government departments. This resulted in a list of problems associated with the current models. Then alternative models for calculating the capital charge rate for New Zealand governmen

Topics: Capital charge régime, Capital charge rate, Capital base, Capital charge, beta, cost of equity, cost of debt JEL classifications, G32
Year: 2011
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