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Learn More About Return on Capital

 

DESCRIPTION Return for the investment made by farmers in physical assets – barn, equipment, and land 
 
It is derived by applying a rate of return on the value of the asset base for the Model Farm 
 
The rate of return is the weighted average cost of capital (WACC) that has been adjusted downward
by the rate of inflation 
Measurement Methodology Model Farm to determine the value of the asset base for barn, equipment, and land. 

The asset values for barn and equipment have been determined using replacement values, adjusted to reflect the average age of these assets.

Data on replacement values and average age were collected in the
Farmer Survey.
 
Land value was determined using Ontario land values for 2012 as reported by Statistics Canada
 
The Weighted Average Cost of Capital (WACC) is calculated using a capital structure of 60% debt and 40% equity
 
Return on equity is as established by the Ontario Energy Board (OEB)
 
The debt rate is the rolling 5-year average business prime interest rate plus
1.5% 
 
The WACC is adjusted downward by inflation and applied to the value of the asset base ($1.30 per kg) for the Model Farm 
 
Updating Frequency Annually updated in the first full quota period in a calendar year 
Updating Methodology Asset Base:  As determined by the Model Farm parameters (fixed until next survey) WACC: 

Updated using the following data:

1.   the debt capital component uses the business prime interest rate: V122495 – Statistics Canada Financial market statistics, last Wednesday unless otherwise stated; Canada; Chartered bank administered interest rates – prime business

2.   the equity component uses an OEB return on equity rate

3.    the inflation rate adjustment uses the change in CPI:
v41690973 – Statistics Canada Consumer Price Index, 2011 basket; Canada; All-items CPI