believes the company\'s power plant is producing too much air pollution on a typ
ID: 2620723 • Letter: B
Question
believes the company's power plant is producing too much air pollution on a typical Your boss island. Your boss gives you three choices for dealing with this problem because he/she does not ant to deal with i 1. You can pay a pollution tax (Carbon Offsets) one time of $13,000,000 immediately 2. You can close the plant and install a power cable from the mainland to the Island That will cost you $1,000,000 at the end of this year, $3,000,000 at the end of next year and then $750,000 forever for maintenance 3. You can retrofit the plant with scrubbers to reduce the emissions to make the plant green. That will cost $7.5m at the end of this year and $100,000 for 50-years for Assume that the cost of generating power on the mainland is approximately the same as the that market has a 12 percent market risk premium on the power plant with the risk-free rate maintenance 9 cost of generating power at the Island's plant. Assume, this comes as a surprise to you and you have not saved any money in reserves, and you need to raise capital. Additional information is being 5 percent with a company tax rate of 35 percent. Current total raised capital at the power plant: (This will help you calculate the WACC) . Debt- 7,000 outstanding bonds, at 7.5% coupon and 20 years to maturity. These bonds pay interest semiannually and quoted a price of 108 percent of par. Common Stock -180,000 shares outstanding, selling for $50 per share: Beta .90 Preferred Stock 8,000 shares of 5.5 percent preferred stock outstanding, currently selling for $95.00 per share. Please answer in essay format and provide your Excel document showing all your calculation in appendixes choose the best option for Island. Support your answer with your calculations. Also o calculations use specified resources, other appropriate scholarly resources, including older articles 9 Length: However long you need to answer the question (Paragraph per option is normal). Your paper should demonstrate thoughtful consideration of the ideas and concepts presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to University's Academic Integrity Policy.Explanation / Answer
Answer )
In the situation , company should think about the financial benefit as well as benefit for society for suistainable development of business . The power plant of compnay is producing too much air pollution , as decission maker we should reduce the pollution for society with low cost invesments. There are 3 options available in front of company .
Option 1 : to pay $13,000,000 as corbon offset cost and continue with the same level of air pollution . The option shouldn't be selected . The option is the most costly one ( shown below in calculation), and not reducing the pollution level for society .
Option 2: Close the plant and take power from mainland by use of cable , this can be a better than the option-1 , but this is not guarantee any fall in air pollution as whole . Getting power from some where will reduce air pollution at local area not on the earth as whole. The option have more cost than option 3 , as shown in calculation table below.
Option 3: Retrofit the plant and reduce the air pollution at island , this can be the best option available , and this is guarantee of fall in air pollution as whole . The retrofit of power plant will reduce air pollution at local area as wells on the earth as whole. The option have the minimum cost among all , as shown in calculation table below.
We should select option -3 as solution of the problem.
Calculation of WACC for company .
WACC = weight of Equity * cost of equity + weight of Preferred stock * cost of Preferred stock + weight of debt * cost of equity
Calculation shown as below:
Calculation of Cash flow for all 3 options
PV for perpetual cash flow = Cash flow / discounting rate .
PV for 50 years of cash flow = Cash flow / Annuity value of discounting rate for 50 years
Cost of Equity Amount of Equity Riskfree rate 5.00% Shares 180000 Beta 0.90 Price 50 Market return 17.00% Value 9000000 Cost of Equity 15.80% Cost of Debt Amount of Debt Rate 7.50% Book value 7000 Taxrate 35% Adjustment 108 Cost of Debt 4.88% Value 756000 Cost of Preferred sahre Amount of Preferred share Cost of P share 5.50% Shares 8000 Price 95 Value 760000 Total Capital 10516000 WACC 14.27%Related Questions
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