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AES Corporation
Electrical power generation and distribution company
Founded in 1981 in the US
Company goes public in 1991
International expansion started in 1991-1992
Organized around four lines of business:
Contract generation
Competitive supply
Large utilities
Growth distribution
Problem Description
PROS
CONS
SUGGESTED METHODOLOGY
1. Adjust beta:
2. Calculate cost of equity (Ke)
3. Calculate cost of debt (Kd)
4. Add Sovereign Spread (SS) to both Ke & Kd
5. Compute WACC
6. Add Business-specific risk (BSR) adjustment
BUSINESS-SPECIFIC (UNDIVERSIFIABLE)
RISK
1. Operational/Technical
2. Counterparty Credit/Performance
Risk
Score
Added Risk
(% equivalent)
5%
4. Construction
10%
5. Commodity
15%
3. Regulatory
6. Currency
7. Contractual Enforcement/Legal
CONS
PAKISTANPROJECT(usingrevisedWACC)
NPV(SS)
NPV(SS&BSR)
413.41
290.08
ProjectYear
UnleveredCF
DiscountedCF(SS)
DiscountedCF(SS&BSR)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
63.2 63.6
64 64.4 64.8 65.2 65.7 66.1 66.5 66.9 67.3
67.7
68.2 68.6
69 69.4 69.8 70.3 70.7 71.1
55.04 48.24 42.27 37.04 32.46 28.44 24.96 21.87 19.16 16.79 14.71 12.88 11.30 9.90
8.67 7.60 6.65 5.84 5.11 4.48
51.82 42.76 35.29 29.12 24.02 19.82 16.38 13.51 11.15 9.19 7.58
6.26
5.17 4.26
3.52 2.90 2.39 1.97 1.63 1.34
USAPROJECT(usingrevisedWACC)
NPV(SS)
NPV(SS&BSR)
804.36
623.12
ProjectYear
UnleveredCF
DiscountedCF(SS)
DiscountedCF(SS&BSR)
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
63.2 63.6
64 64.4 64.8 65.2 65.7 66.1 66.5 66.9 67.3
67.7
68.2 68.6
69 69.4 69.8 70.3 70.7 71.1
60.00 57.32 54.75 52.30 49.96 47.72 45.65 43.60 41.64 39.77 37.98 36.26 34.68 33.12 31.62 30.19 28.83 27.56 26.31 25.12
58.23 53.99 50.05 46.40 43.02 39.88 37.02 34.32 31.81 29.48 27.32 25.32 23.50 21.78 20.18 18.70 17.33 16.08 14.90 13.81
USAPROJECT(usinghistorical WACC)
Historical WACC
NPV
0.12
490.55
ProjectYear
UnleveredCF
DiscountedCF
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
63.2 63.6
64 64.4 64.8 65.2 65.7 66.1 66.5 66.9 67.3
67.7
68.2 68.6
69 69.4 69.8 70.3 70.7 71.1
56.43 50.70 45.55 40.93 36.77 33.03 29.72 26.70 23.98 21.54 19.35 17.38 15.63 14.04 12.61 11.32 10.17 9.14 8.21 7.37
How does the adjusted cost of capital (WACC) for the Pakistan Project
reflect the probabilities of real events? What does the discount rate
adjustment imply about expectations for the Project because it is located in
Pakistan and not in the US?
CONCLUSIONS
Revised methodology suggests major differences between the risk profiles of
these countries
Pakistan more likely to suffer from regulatory, construction and FX and legal risk
while not in the US
Country specific risk would include real events like currency fluctuations,
contractual and legal issues, and counterparty credit issues.
Project NPV halved if the project is done in Pakistan rather than the US