Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are working for a public utility regulatory office. An electricity company has presented the following information for the approval of the rate of return.

You are working for a public utility regulatory office. An electricity company has presented the following information for the approval of the rate of return.

The company claims a total $50m of capital expenses, has a WACC = 8.7%, incurs OPEX = $4m, and depreciation = $2m. The tax rate = 25%. The company is financed 60% by debt and 40% by equity. The regulator determines that 15% is a fair return to equity holders. The company also claims that its after-tax cost of debt is $2.25m (can you replicate this number?)

The capital expenses (i.e., assets) that the company presents consists of:

  • Grid capacity expansion: $25m
  • Modern control system: $5m
  • Substations: $5m
  • Software: $5m
  • Safety instruments: $5m
  • CEO's office renovation and private jet: $5m

  • Which investment items you might not approve?
  • What net revenue under WACC will you allow for the company?
  • How much total revenue will you approve for the company?
  • Would you include the $2.25m cost of debt in the calculation of approved revenue? Why or Why Not?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managing Human Resources

Authors: Susan E Jackson, Randall S Schuler, Steve Werner

12th Edition

0190857560, 9780190857561

More Books

Students also viewed these Economics questions

Question

Review major psychological issues of childhood.

Answered: 1 week ago

Question

Mortality rate

Answered: 1 week ago

Question

Armed conflicts.

Answered: 1 week ago