The Cost of Capital at AES

Before setting up business either international or local, there are some factors to put into consideration. Even if your business is doing well and expanding at a high rate one must put into consideration the risks that ascertain that particular business. In the case of the AES, the founders did not put much consideration into their expanding business to the overseas accounts. Their main undoing was the assumption of the risks involved as same as in the U.S as it were in the foreign countries. The AEs had its majority revenues linked to overseas operations with approximately one-third coming from South America alone. Since the company depended on these operations almost wholly, any changes involved as per this could have affected them greatly. And that’s why the company’s international exposure hurt AEs during the global economic downturn that began in late 2000.

In addition, they did not take into consideration that as a global company with operations in countries that are hugely different from the U.S they needed a more sophisticated way to think about risk and the cost of capital around the world. besides,, with AES’s international expansions, the model of capital budgeting was not supposed to be exported to projects overseas, since the same model became increasingly strained with the expansions in brazil and Argentina because hedging key exposures such as regulatory or currency risk was not feasible. In addition, the financial structure of a going-concern business like a utility was notably different than that of a limited-lifespan asset like a generating facility.

factors such as the devaluation of key south American currencies, especially during 2001, when a political and economic crisis in Argentina brought about a significant devaluation of most south American currencies against the U.S. dollar, conspired to weaken cash flow at AEs subsidiaries and hinder the company’s ability to service subsidiary and parent-level debt. This was much evident in