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Globalizing the Cost of Capital and Capital Budgeting at AES 1 . How did AES s organizational structure ( given in Exhibit 6 in the

Globalizing the Cost of Capital and Capital Budgeting at AES
1. How did AESs organizational structure (given in Exhibit 6 in the case) exacerbate the problems of the old capital budgeting method? Carefully explain the creation and role of leverage. What risks were levered by the construction? How does a 12% rule on equity dividends to AES translate into required returns on the operation assets?
2. An alternative method of reflecting risk in a discounted cash flow approach is to adjust the cash flows instead of the discount rate. For example one may multiply cash flows by the respective probability of occurrence. Given the cost of capital estimates for the Pakistan project above, what probabilities do they reflect for the real events? Do you think this is reasonable?

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