Aes Case Solution

Good Essays
1. How would you evaluate the capital budgeting method used historically by AES? What’s good and bad about it?
“When AES undertook primarily domestic contract generation projects where the risk of changes to input and output prices was minimal, a project finance framework was employed.”
Usually, project finance framework is used when the project has predictable cash flows, which can easily represent operating targets through explicit contract. When cash flows are certainty, the company can have higher level of leverage and it is easier to separate project assets from the parent company.

Advantages and Disadvantages: 1) Advantages a. Maximize Leverage b. Off-Balance Sheet Treatment c. Agency Cost d. Multilateral Financial Institutions 2) Disadvantages a. Projects V/S Division b. Complexity c. Macroeconomic Risk d. Political Risk:

2. If Venerus implements the suggested methodology, what would be the range of discount rates that AES would use around the world?
If Venerus and AES implement the suggested methodology, the projects would change while WACC changes.
To find WACC we must first calculate the leveraged bets for each the US Red Oak and Lal Plr Pakistan projects, using the equation unleveled beta/(1-D/V). It is easy to find debt to capital ratios, which are 39.5% for U.S and 35.1% for Pakistan, and the unleveled beta, which are both 0.25, in Exhibit 7a and 7b. Then we can obtain a leveraged beta for the U.S., 0.41, and for Pakistan, 0.3852.
Second we should find the risk free and risk premium rates. Because all debts are finance in U.S. dollar, we use the risk free rate, which is equal to U.S. T-bill, and risk premium rate, which is equal to U.S. risk premium, to calculate the cost of capital for all countries. Using equation cost of capital = Risk Free Rate + levered beta * Risk Premium, we can get the cost of capital for U.S. project, 7.27%, and for Pakistan project, 7.2%.
After that we should find the

You May Also Find These Documents Helpful

  • Powerful Essays

    AES Case

    • 1808 Words
    • 8 Pages

    Sunday, March 15, 2009 COST OF CAPITAL AT AES Evaluating the Historical Capital Budgeting Method Currently AES employs Project Finance Framework. Project finance tends to be used in projects with tangible assets with predictable cash flows in which construction and operating targets can be easily established through explicit contract. The key to AES projects financing lies with the precise forecasting of cash flows. In effect, the possibility of estimating cash flows with an acceptable…

    • 1808 Words
    • 8 Pages
    Powerful Essays
  • Powerful Essays

    Aes Case

    • 1244 Words
    • 5 Pages

    Case 3: Globalizing the Cost of Capital and Capital Budgeting at AES Question 1 Explain and comment on the capital budgeting method used historically by AES. Is there a need for change? Explain. Question 2 If Venerus implements the suggested methodology, what will be the adjusted discount rate for the Red Oak project (USA) and the Lal Plr project (Pakistan)? Question 3 Calculate the effect that a revision of its cost of capital will have on the Lal Plr project’s NPV. Comment on the…

    • 1244 Words
    • 5 Pages
    Powerful Essays
  • Good Essays

    AES Case Analysis

    • 1202 Words
    • 4 Pages

    AES - Case Analysis & Write up How would you evaluate the capital budgeting method used historically by AES? What is good and bad about it? Previously, the economics of a given project were evaluated at an equity discount rate for the dividends from any project and as it was mostly financed through local debt, which was non-recourse to the parent company, AES use to evaluate the dividend cash flows at a standard 12%. It is a simple approach with portions of sound reasoning. One could argue that…

    • 1202 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Aes Case Analysis

    • 277 Words
    • 2 Pages

    By doing so, Scholey wanted the AES-Telasi could have the same standard of other AES distribution operations. One of the key investments was meter household to link consumption. Consistent with the AES model of empowerment, line-level employees would be allowed to decide which investments were appropriate. II. Combating corruption. Started negotiating with a state-owned company that had a legal monopoly on the import of electricity from Russia. He knew the AES needed reliable supplies in order…

    • 277 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    Case Study - AES Corporation

    • 10340 Words
    • 42 Pages

    GRADUATE SCHOOL OF BUSINESS STANFORD UNIVERSITY S HR-3 FEBRUARY 1997 HUMAN RESOURCES AT THE AES CORPORATION: THE CASE OF THE MISSING DEPARTMENT Dennis Bakke, the CEO of AES, a company that develops, builds and operates electric power plants, sat in his office late in 1996 and thought about the question that was perennially posed to him: could AES, soon to have some 25,000 people located literally all over the world following a recent purchase of power plants in Kazakhstan, continue to operate…

    • 10340 Words
    • 42 Pages
    Powerful Essays
  • Better Essays

    Aes - Hbs Case Study

    • 1353 Words
    • 6 Pages

    1. How would you evaluate the capital budgeting method used historically by AES? What's good and bad about it? Historically, the AES capital budgeting method primarily used the following assumptions: • All nonrecourse debt was regarded as good • Dividend cash flow were considered equally risky • Project was evaluated by the equity discount rate for the dividends from the project • A 12% discount rate was applied to all projects. The historical method is quite simplistic…

    • 1353 Words
    • 6 Pages
    Better Essays
  • Good Essays

    AES case study

    • 373 Words
    • 1 Page

    A. Situation: What are GMs translation and transaction exposure to the yen? What is GM’s competitive exposure to the yen? (Quantify­ how much could they lose?); Steps to estimate GM’s loss from a 20% devaluation of the yen: 1. Compute the percentage cost savings the Japanese automakers will pass on to consumers (how much will they lower prices) 2. How many more cars will the Japanese sell per year at this lower price? 3. How many less cars will GM sell? 4. How much profit will GM lose due to lost sales to the Japanese…

    • 373 Words
    • 1 Page
    Good Essays
  • Better Essays

    1. Describe AES’s organizational structure? What are its authority structures and control processes? What role do values play in this structure? AES organization has developed a unique decentralized “honeycomb” structure (See Exhibit 1) based on its core values. Their innovative authority structure empowered people at every organizational level to make decisions and take responsibilities according to the business needs. It helped company to achieve flexibility and accelerate decision-making…

    • 1148 Words
    • 5 Pages
    Better Essays
  • Best Essays

    Aes Shrm

    • 1541 Words
    • 7 Pages

    Human Resources at the AES Corporation: The Case of the Missing Department discuss the effectiveness of AES’ approach to HRM, and make recommendations for the future. Table of Contents INTRODUCTION 4 ADVANTAGES OF AES’ APPROACH 5 CONCERNS 6 RISKS GOING FORWARD 7 RECOMMENDATIONS 8 CONCLUSION 9 APPENDIX 10 BIBLIOGRAPHY 11 INTRODUCTION AES’ annual results speak for themselves, financial data available, from 1991 to 1996 shows that…

    • 1541 Words
    • 7 Pages
    Best Essays
  • Good Essays

    Aes Encrypt

    • 1445 Words
    • 6 Pages

    Advanced Encryption Standard (AES) Most of lecture slides by Lawrie Brown Origins clear a replacement for DES was needed   have theoretical attacks that can break it have demonstrated exhaustive key search attacks can use Triple-DES – but slow, has small blocks US NIST issued call for ciphers in 1997 15 candidates accepted in Jun 98 5 were shortlisted in Aug-99 Rijndael was selected as the AES in Oct-2000 issued as FIPS PUB 197 standard in Nov-2001 AES Requirements private key symmetric…

    • 1445 Words
    • 6 Pages
    Good Essays