This assignment is about estimating the weighted average cost of capital for

PSE&G$.$ As a regulated monopoly, PSE&G is price and profit regulated so that

the firm does not use its monopoly market power to earn excess rates of return and

net income; excess meaning a level of profit above that which is commensurate

with the investment risk in the utility. Therefore, the New Jersey Board of Public

Utilities regulates the rate of return that the electric and natural gas utility can earn

on its investment.

The revenues that the utility is designed to collect through electric and gas

rates is:

Required Revenues $=($O&M expenses $+$ depreciation $+$ taxes$)+$ k $($rate base or

capital investment$)$

Note that k$,$ which is the fair rate of return commensurate with investment risk, or

the cost of capital, is estimated using the weighted average cost of capital $($wacc$).$

The wacc, as we know, includes the cost of capital on all of the types of securities

that the utility uses to raise capital funds. For PSE&G$,$ they are long$-$term debt

$($LTD$),$ preferred equity $($PE$)$ and common equity $($CE$).$ Therefore, you will need

the following to estimate the wacc for PSE&G:

$1)$ Yield to maturity $($YTM$)$ on long$-$term debt,

$2)$ Dividend yield on preferred equity,

$3)$ Cost of common equity,

$4)$ LTD to total assets $($TA$)$ ratio,

$5)$ PE to TA ratio,

$6)$ CE to TA ratio, and,

$7)$ Corporate tax rate $($Tc$).$

$8)$ Please make sure the $4,5,$ and $6$ add to $1\mathrm{.}0.$

To do that you will need to use the data for PSEG Enterprises, Inc. as it wholly

owns PSE&G$,$ the utility, and PSEG stock, bonds and preferred stock are publicly

traded. Although the course states to use market value LTD$,$ PE and CE ratios, the

utility industry and regulators use book values to get those ratios. Therefore,

please obtain the $2022$ Annual Report for PSEG Enterprises, Inc. to get the balance

sheet for the ratios. You can use a representative PE stock dividend yield for the

PE cost of capital and use a $30-$year bond representative for the YTM$.$ There are

many PE issuances and bonds for PSEG so choose one representative of each for

the calculations. For the CE$,$ use the CAPM and dividend discount model $($DDM$)$

to estimate two different measures of the cost of CE$.$ We should know both by

now, but I will repeat the DDM as we spent less time on it than the CAPM

implementing the DDM for this purpose. It is:

$=0(1+)$

$0$

$+$ where D is the last $12-$month dividend per share, P is the latest

closing stock price and g is the growth rate that you should know. Note that

different measures can be used for P and g$.$ For example, P may some form of

average of stock prices if deemed more representative than the latest closing price.

This is a choice that the analyst makes. The g could be the g from Value Line

predicted earnings per share, the same from Yahoo, or Zacks,... That is your

choice as the analyst.

Now, obtain the CAPM cost of CE using the beta from Yahoo and $0\mathrm{.}04$ for

the $$risk$-$free$$ rate of return and $0\mathrm{.}12$ for the rate of return on the stock market.

Whenever doing calculations, do not use $\%$s for safety. Use decimals. Mixing

both leads to error. Now average the DDM and CAPM estimates and use that

result for your CE cost of capital.

Finally calculate the wacc $($k$)$ for PSE&G and briefly write$-$up your results.

This value will be used in Assignment $3$ to estimate the market of PSEG

Please provide all relevant calculations in a detailed manner.