With global electricity producing companies, AES Corp. is looking for a practice for computing the cost of capital for its different business divisions and potential tasks. Previously, AES utilized the same cost of capital for its overall capital budgeting. However the company’s global expansion has challenged this methodology and whether a singular cost of capital satisfactorily represents the various threats AES confronts in its varied business units and different circumstances. The company has presently experienced substantial damages and harm because of currency devaluation in South America and governing changes in different nations. The director of the corporate planning team is devising a procedure for taking into consideration various country and project risks. The case lets the students makes use of this approach to compute the cost of capital for 15 different global tasks. Students must contemplate about how an international company can take into consideration various risks and threats in assessing its global functions and in foreign financing.
Cost of Capital for Lal Pir Project
Levered Beta, Cost of Equity Calculation, Cost of Debt Calculation, Weighted Average Cost of Capital Calculation, Discount Rate Calculation
Calculating the Range of Discount Rates for AES
Cost of Equity Calculation, Cost of Debt Calculation, Weighted Average Cost of Capital Calculation, Discount Rate Calculation
If the project was in USA,
PV of Cash Flows, Project Value*
1. What is AES’s business and its historic approach to capital budgeting,
2. How would you evaluate the capital budgeting method used historically by AES? What’s good or bad about it?
3. If Venerus implements the suggested methodology, what would be the range of discount rates that AES would use around the world?
4. Does this make sense as a way to do capital budgeting? Does it agree with finance theory? What risks are considered in the process?
5. Does this make sense as a way to do capital budgeting?
6. What is the value of the Pakistan project using the cost of capital derived from the new method? If the same project were located in the U.S., what would its value be?
7. Calculate the effect that a revision of its cost of capital will have on the Lal Plr project’s NPV. Comment on the results.
8. How does the cost of capital for the Pakistan project reflect the probabilities of real events? What additional risks are being accounted for because the project is located in Pakistan rather than the U.S.?
9. Would you recommend that AES adopt the new method for computing cost of capital?