Analysis
Cost of Capital and Capital Structure for a Renewable Energy Firm
Overview
What this challenge is about.
Your task is to estimate GreenGrid's current cost of equity using CAPM (risk-free rate 2%, market risk premium 6%, beta 1.2), cost of debt (4.5% pre-tax), and tax rate (22%). Then model the impact of issuing €200M in new debt (increasing leverage from 30% to 50% debt-to-capital) on WACC, assuming the cost of equity rises due to financial risk (new beta 1.4). Success means providing a clear recommendation on whether to proceed with the debt issuance, supported by calculations of WACC, firm value (assuming constant EBIT of €100M), and a discussion of trade-offs (tax shields vs. financial distress costs).
The Brief
What you'll do, and what you'll demonstrate.
Should GreenGrid Energy increase its debt-to-capital ratio from 30% to 50% to finance an offshore wind expansion, and what is the optimal capital structure?
Earning criteria — what you'll demonstrate
- Calculate the cost of equity using CAPM and cost of debt after tax
- Compute WACC and understand its components
- Analyze the impact of leverage on WACC and firm value
- Evaluate the trade-off between tax shields and financial distress costs
Program Fit
Where this fits in your program.
Sharpens the same skills your degree expects you to demonstrate.
Skills
Skills you'll demonstrate.
Each one shows up on your verified credential.
Careers
Roles this prepares you for.
Real titles. Real skill bridges. Pick the one closest to your trajectory.
Career mappings coming soon.