Determining the discount rate: The case of oil industry in Serbia

The paper presents theoretical and methodological aspects of determining the discount rate on the example of NIS, as the largest energy company in Serbia and one of the largest in Southeast Europe. The total cost of capital which represents the weighted average of equity and long-term debt costs is used as discount rate. The cost of equity capital is calculated using the CAPM which, despite all its limitations, is still theoretically the most correct and frequently used model in practice. The average cost of long-term debt capital to the company NIS is equal to 14.773%, the cost of equity capital is 12.453% and the total cost of capital, WACC, is 12.505%. The main component of the cost of equity capital is the risk premium of investing in Serbia. The results show that macroeconomic stability strengthening and adequate management of borrowed funds can contribute to reduction of the total cost of capital in the Serbian oil industry.