ESSAY: Business Finance

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:

You can pay a pollution tax (Carbon Offsets) one time of $13,000,000 immediately.
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.
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.

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Grading Guideline –

The introduction should state the answer and establish the topic and a clear thesis statement.
The conclusion summarizes the main points and leaves the reader with a strong comprehension of the paper’s significance and the author’s understanding of the correct financial decision.
All research is correctly credited, using correct APA format.
Grammatically correct – No spelling, grammar, or mechanics errors.

ANSWER

Businesses are always faced with decisions that they have to grapple with. The case presented herein is a typical example of the need to use the weighted average cost of capital to evaluate the validity of a decision to be selected among the presented three. Based on the calculated WACC, option three recorded a present net worth of $7708508.41 which is the lowest as compared to the second option whose present value is $ 10263846 and options one which recorded a net present value of $ 13000000 in a single offset. It is thus more feasible to retrofit the plant with scrubbers as a way of reducing the number of carbon emissions to make the plant green. The estimated cost for this option is to pay an estimated $ 7.5 million at the end of the first year and $ 100,000 for the next 50 years just for maintenance. Thesis statement: Paying an initial cost of $ 7.5m in the first year and then a maintenance cost of $ 100,000 for the next 50 years is the most feasible option than the first two options.

WACC towards decision making To identify which option is best for reducing the rate of pollution as indicated in the case study, it is important to identify the weighted average cost of capital. The option given is payment for the pollution tax or carbon offsets that cost $ 13,000,000. The second….