Background: Today is your first day working in the corporate finance department at Energy Ltd (`Energy'),...
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Background: Today is your first day working in the corporate finance department at Energy Ltd (`Energy'), a (hypothetical) New Zealand based electricity generator and retailer (`gentailer'). The company derives about 50% of its profits from each of these two activities (electricity generation and electricity retail). Energy' electricity generation comes from hydro (45%), geothermal (35%) and coal (20%). Its electricity retail operations involve a mix of residential, commercial and industrial customers throughout New Zealand. The company has a share price of $2 and 300 million shares outstanding. It has debt with a book value of $400m. The company's shares are listed on the New Zealand share market. Its shareholders are mostly New Zealand retail investors and New Zealand based funds. Question 1: The first task which Annemarie Winter, the chief financial officer (CFO), asks you to do is to review the company's method for estimating a weighted average cost of capital (WACC), which the company uses as the discount rate to determine the net present value (NPV) of potential new electricity generation projects. The CFO provides you with the following summary of the methodology: We use the following formula to estimate our WACC: WACC = E E+D XrE+ D E+D (1 T) This WACC is used as the discount rate when we determine the NPV of potential new electricity generation projects. We estimate the cost of equity (r) by applying the capital asset pricing model (CAPM) as follows: Y = + (E[mkt r]) - Background: Today is your first day working in the corporate finance department at Energy Ltd (`Energy'), a (hypothetical) New Zealand based electricity generator and retailer (`gentailer'). The company derives about 50% of its profits from each of these two activities (electricity generation and electricity retail). Energy' electricity generation comes from hydro (45%), geothermal (35%) and coal (20%). Its electricity retail operations involve a mix of residential, commercial and industrial customers throughout New Zealand. The company has a share price of $2 and 300 million shares outstanding. It has debt with a book value of $400m. The company's shares are listed on the New Zealand share market. Its shareholders are mostly New Zealand retail investors and New Zealand based funds. Question 1: The first task which Annemarie Winter, the chief financial officer (CFO), asks you to do is to review the company's method for estimating a weighted average cost of capital (WACC), which the company uses as the discount rate to determine the net present value (NPV) of potential new electricity generation projects. The CFO provides you with the following summary of the methodology: We use the following formula to estimate our WACC: WACC = E E+D XrE+ D E+D (1 T) This WACC is used as the discount rate when we determine the NPV of potential new electricity generation projects. We estimate the cost of equity (r) by applying the capital asset pricing model (CAPM) as follows: Y = + (E[mkt r]) -
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