This compensates the Commonwealth for opportunities foregone by tying up funds. This return comes in the form of dividends on profits, capital use charges on equity, and interest on loans. The Commonwealth has various mechanisms it uses to protect the value of its investment in agencies. Among these is the need for budgeted operating losses to be approved by the Minister for Finance and Administration. Operating losses not only erode equity but also reduce the returns received either through dividends or capital use charges.
Equity is a proxy for the value of the shareholders' investment in an entity.
An entity's equity is equal to its net assets where net assets are an agency's total assets less its total liabilities. Where liabilities exceed assets, the agency is said to have net liabilities or negative equity. The cost of equity is the opportunity cost shareholders forgo on the funds they invest in an entity. It is the rate that shareholders could expect to earn by holding assets of similar risk. Shareholder value is only maintained if an entity earns a return on equity at least equal to the cost of equity employed.