Question
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?
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