FINANCIAL FIN B280- LNG Power is a public utility company in the US. It focuses solely

| June 14, 2018

Question 2LNG Power is a public utility company in the US. It focuses solely on generating and distributing electricity to the US households by using LNG as fuel. To facilitate the evaluations of a number of new projects, LNG Power is computing its weighted average cost of capital (WACC). The details of its capital structure are as follows,Bank loan: $528,000,000 10-year bank loan with 6.5% p. a. loan rate. No information is available to the market value of the bank loan.Corporate bond: 500,000 units of 10-year, 5% p.a. coupon bonds. The bond was issued 2 years ago, which means it has 8 years left to maturity. Face value is $1,000 per unit of bond and currently it is trading at face value.Preferred stock: 3,200,000 shares outstanding of 6% preferred stock with par value of $50. The stock is currently trading at $42 per share.Common stock: 12,500,000 shares of common stock outstanding with par value of $1. Current market price is $35 per share. Beta for the common stock is 0.96. Market risk premium and risk-free rate are 8% and 4% respectively.a) Find the market values and capital structure weights of all kinds of capital used by LNG Power. Make appropriate assumption whenever necessary. b) Built on the results from the previous part and assume 30% corporate tax rate, calculate the WACC of LNG Power. c) LNG Power is contemplating building a new LNG power plant in the US. The initial outlay is estimated to be $120,000,000. The after-tax cash flow for the 1st year will be $10,000,000, thereafter it will grow at 1.5% ad infinitum. Calculate the NPV for this new project and make recommendation if LNG Power should accept it. d) Meanwhile, to stabilize the LNG supply, LNG Power is also considering investing in a project which explores and develops LNG fields in the US. The after-tax cash flows of this project are estimated as follows,Year After tax CF($M)0 -2001 702 1003 1204 805 40To reflect the difference in risk with the existing projects, LNG Power adopts a subjective approach to adjust the cost of capital and has decided to use an adjustment factor of +6%. Again calculate the NPV for this new project and make recommendation if LNG Power should accept it.

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