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Railroad industry cost of capital for 2025: CAPM averaged with a three-stage DCF, market-value weights (Surface Transportation Board, EP 558 Sub-No. 29)

ToolCost of Capital
SourceSurface Transportation Board (2026). Railroad Cost of Capital—2025. Decision, Docket No. EP 558 (Sub-No. 29), served 10 September 2026, Washington, DC. Tables 8, 10, 11, 12, 15 and 16, pp. 16–20.
LevelProfessional

Problem

The Board sets the railroad industry's cost of capital each year. For 2025 the risk-free rate is 4.78 % (20-year Treasury), the industry beta 0.7971 and the market risk premium 7.37 %. A three-stage discounted cash flow model is run for CSX, Norfolk Southern and Union Pacific: cash flows of 2,951, 2,096 and 5,908 (terminal bases 3,574, 2,744 and 6,926), stage-one growth 6.30, 6.33 and 7.30 % for five years, stage-two growth 6.64 % for five years, 5.57 % for ever after, against market values of 67,540, 64,583 and 137,560 (all in $ million). The debt yields 5.171 % plus 0.093 point of flotation cost; the market values are 260,420 of equity and 56,585 of debt. Find the cost of equity as the average of the two models and the composite cost of capital.

Inputs to Enter

  • Equity method: average of CAPM and multi-stage DCF; risk-free rate 4.78 %, beta 0.7971, market premium 7.37 %, no size, company or country premium
  • Cash flow rows: CSX, 2951, 3574, 6.30, 6.64, 67540; NSC, 2096, 2744, 6.33, 6.64, 64583; UPC, 5908, 6926, 7.30, 6.64, 137560; stages 5 and 5 years, long-run growth 5.57 %
  • Debt yield 5.171 %, flotation 0.093 point, tax rate 21 % (the Board applies no tax factor); market values: equity 260,420, debt 56,585, no preferred stock
  • Inflation 2.40 % (the decision's long-run expected inflation) for the real rate; Hamada relation for the leverage tables
Open the Cost of Capital tool (loaded with this example)

Answers

  • CAPM: 4.78 + 0.7971 · 7.37 = 10.65 % (decision, Table 10: 10.65 %)
  • Multi-stage DCF: CSX 11.14 %, NSC 10.01 %, UPC 11.16 % (Table 11: 11.14, 10.01, 11.16 %); weighted by market value 2.79 + 2.40 + 5.69 = 10.88 % (decision: 10.88 %)
  • Cost of equity (10.65 + 10.88)/2 = 10.77 % (Table 12: 10.77 %); cost of debt 5.171 + 0.093 = 5.264 % (Table 8: 5.264 %)
  • Weights: debt 17.85 %, equity 82.15 % (Table 15: 17.85, 82.15 %)
  • Composite with the debt before tax 9.78 % (Table 16: 9.79 %, the product of components already rounded to two decimals: 5.26 · 17.85 % + 10.77 · 82.15 %; unrounded 9.785 %)
  • The tool's additions: after-tax WACC at 21 % 9.59 %, real WACC 7.02 %, unlevered beta 0.6803 and unlevered cost of capital 10.34 %

Notes

The tool's default inputs are this case; press Submit. The yearly cash flows and present values of the decision's Table 11 are reproduced within 1 ($ million). The decision's composite is a regulatory rate of return without a tax factor on the debt; the page prints it beside the after-tax WACC. The beta 0.7971 is entered: the decision prints the regression summary, not the weekly returns.