You have been asked to estimate the cost of capital for a power plant being cons

Question

You have been asked to estimate the cost of capital for a power plant being considered in thailand by a U.S- based utility. The plant will require an initial investment of $1 billion and will be independently financed using 60% debt (carrying an after-tax rate of 4.5%) and 40% equity. The beta for power plants is expected to be 0.8, and the treasury bond rate is 7%.

a. estimate the cost of equity for this power plant, in U.S dollars.

b. estimate the cosst of capital for this power plant. in U.S. dollars.

c. how would your analysis differ, if it were done in local currency.

Explanation / Answer

Ans)

a. Using Capital Asset Pricing Model

Cost of equity = risk free rate + beta(Market Risk Premium)

= 7,+ 0.8(5.5)

= 11.40 %

therefore cost of equity in U.S dollars = 0.4 billion * 11.40 %

= $ 0.0456 billion

b. cost of capital = cost of debt ( after tax) + cost of equity

= 0.6*4.5% + 0.0456

= 0.0270 + 0.0456

= $ 0,0726 billion

C. After calculating cost of capital, by using foreign currency exchange rate and by converting in to local currency , then analsis has to be made.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.