Question

Your boss believes the company's power plant is producing too much air pollution on a typical island. Your boss gives you three choices for dealing with this problem because he/she does not want to deal with it:

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 maintenance.  

Assume that the cost of generating power on the mainland is approximately the same as the 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 that market has a 12 percent market risk premium on the power plant with the risk-free rate 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, to calculations use specified resources, other appropriate scholarly resources, including older articles.

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.

Answer 1

SOLUTION:-

Cost % 19 20 Common stock C Market value 15.80% $ 9,000,000 5%+0.9*1291 180000*50 Market value weights 0.5196 WACC (Cost % Weights) 8.21% 23 Debt (After tax cost) $ 0.4365 1.92% 4.40% RATE (20*2,75/2,-1080,1000)*2*(1-35%) 7,560,000 7000*1080 25 26 Preferred stock S 0.0439 0.25% 5.79% 5.5/95) 760,000 8000*95 27 Total S 17,320,000 1.0000 WACC 10.38% 33 Present value of costs 34 PV of option 1 13,000,000 35 PV of option 2 9,298,647 1000000/(1+10.38%)+3000000/(1+10.38%)^2+(750000/10.38%)/(1+10.38%)^2 36 PV of option 3 7,661,247 7500000/(1+10.38%)+(PV(10.38%,50.-100000)/(1+10.38%) 37 38 Paying $750,000 at the end of this year and $100,000 for 50 years is best option