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
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internal rate of return related to the investment was not high enough to justify a purchase of the company. Peabody’s cost of debt was .038. This was calculated by assuming a 40% tax rate and .095 rate on debt (Exhibit 3). There was a .095 interest rate on notes payable due June 30‚ 1998; therefore‚ we assumed the rate of debt at the time of purchase would have been similar. Also‚ Peabody’s cost of equity was .1397. This was calculated by using a risk-free rate of .055‚ which was the rate of the 90-day T-bill
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production would begin in 2008. The project will cost $18 million‚ with $16 million in 2007 and an additional $2 million in 2008. The $18 million investment will be depreciated using the straight-line method for six years and a zero salvage value. Although‚ the equipment is believed to be able to be sold at the end of the project for $1.8 million. The main purpose of the project is to save on operational costs by producing shortwood. The cost savings is estimated to be $2 million in the first
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rate has to be developed and the relevant valuation attribute in the year T + 1 should be constructed. This error is experienced in all three papers. The inconsistent discount rate error arises due to inconsistency between cost of equity capital and weighted average cost of capital. This error is experienced by Francis and Penman. The missing cash flow error exists due to an inconsistent way of calculating the valuation attributes. Courteau and Francis suffer this error. Therefore this article argues
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Globalizing the Cost of Capital and Capital Budgeting at AES (Case Analysis) AES Corporation AES was founded by Roger Stan and Dennis Bakke in 1981 after the Public Utility Regulation Policy Act (PURPA)‚ which created a market for independent power producer. In 1980s‚ the company experienced rapid growth in United States and went into public in 1991. From early 1990s‚ AES began to explore offshore markets and made remarkable success. In the 12 years since it went public‚ AES has hold more
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Instructor:________________________ 1. In 2008‚ Miles‚ Ana and Cindy‚ who are partners in the MAC Company‚ had average capital balances of $114‚000‚ $98‚000 and $128‚000‚ respectively. The partners share profits and losses by allowing a 12% return on average capital‚ with any remaining income or loss divided in a ratio of 5:3:2. If the company’s income for the current year was $147‚600‚ Cindy’s capital account would increase by: a. $55‚568 b. $44‚880 c. $36‚720 d. $29‚520 2. The total number of shares of
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production cost. Competition from peer companies has significant effect on its operation‚ because Hill County is price taker in the market‚ that is‚ increase in prices is not one of the choices it can implement. Also‚ due to the fact that its profitability relies heavily on cost management‚ an intense competition can worsen the situation of Hill County in the future. Hence‚ the company needs to be very efficient in order to compete with other low-cost production firms. In addition‚ cost management
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SHEETER REPLACEMENT DECISION Teaching Note Synopsis and Objectives The owner of a midsize folding carton printer is considering the replacement of an old machine for cutting sheets of paper from rolls (a sheeter) with a new one. This standard capital budgeting analysis‚ which requires identification of both the relevant cash flows and the relevant discount rate‚ is enhanced by an alternative that is not explicitly stated but can be readily identified and analyzed—to outsource all sheeting and
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SEMINAR 4: FRIDAY 7th NOVEMBER 2014 ASSET PRICING Seminar Questions to be completed before class 1. Explain‚ using examples the difference between systematic risk and unsystematic risk. 2. Why is it useful to calculate returns on assets using either a one-factor model such as‚ CAPM or a multi-factor model such as‚ APT? 3. Answer questions 8 and 10 on page 316 of the Hillier et al. (2013) text. 4. Multifactor Model The monthly return on an asset‚ Rs is determined by the following equation: Rs = 0
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Point Group decided to do their own analysis in order to decide if Nike shares should be purchased for the fund. The weighted average cost of capital (WACC) is the rate that a company is expected to pay its debt and equity holders to finance its assets. It is the minimum return that a company must earn on existing asset base to satisfy its owners‚ creditors‚ and other providers of capital or they will invest somewhere else. Companies raise money from many sources such as common and preferred equity‚
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