SBS BBA AAE
Part A
Case: Globalizing the Cost of Capital and Capital Budgeting at AES
Answer the following case study. Each question carries 6 marks.
- What were the risk factors that AES had come across in developing markets? In what way did these factors influence the company?
- What is the reason that companies should use different capital budgeting techniques, namely discount rate calculation models, for domestic and international projects? Give examples from the case.
- Using the approach developed by Venerus calculate the cost of capital for Kelvin project in South Africa. (You can find all the necessary information in exhibits 7a, 7b, 8. 9a, 9b, 10 and 11, assume that EBIT coverage ratio is 2.6X. You should also include WACC adjustments for Unsystematic risk)
- Describe the systematic and unsystematic risks in general. Give examples of systematic and unsystematic risks from the case.
- What are the possible consequences of accepting inaccurate methodology of computing cost of capital on AES?
Part B
Case: Netscape’s Initial Public Offering
Answer the following case study. Each question carries 6 marks.
- What is the reason for loss-making company (Netscape) being valued as high as over $ 1 billion? (Please refer to exhibits 1 and 2 for company fundamentals)
- What are the pros and cons of going public?
- Describe the general IPO process giving examples from Netscape’s IPO.
- What are the features and characteristics of preferred stocks and common stocks? Why does Netscape’s senior management team find convertible preferred stocks more attractive than high salaries?
- What are the potential risks and rewards of increasing the offer price for Netscape from $14 to $28 as suggested by the underwriters?
