Background: Today is your first day working in the corporate finance department at Venus Ltd (Venus'), a (hypothetical) New Zealand based electricity generator and retailer (gentailer'). 1 The company derives about 50% of its profits from each of these two activities (electricity generation and electricity retail). Venus' electricity generation comes from hydro (45%), geothermal (35%) and coal (20%). Its electricity retail operations involve a mix of residential, commercial and industrial customers throughout New Zealand. The company has a market capitalisation of $2.5 billion. It has debt with a book value of $400m. The company's shares are listed on the New Zealand share market. Its shareholders are mostly New Zealand retail investors and New Zealand based funds. Question 1: The first task which Annemarie Winter, the chief financial officer (CFO), asks you to do is to review the company's method for estimating a weighted average cost of capital (WACC), which the company uses as the discount rate to determine the net present value (NPV) of potential new generation projects. The CFO provides you with the following summary of the methodology: - We use the following formula to estimate our WACC: WACC=E+DErE+E+DDrD This WACC is used as the discount rate when we determine the NPV of potential new electricity generation projects. - We estimate the cost of equity (rk) by applying the capital asset pricing model (CAPM) as follows: rE=rf+l(E[rMkt]rf) - We use a long-term average of the return on the S\&P/NZX 50 index to estimate the market return. - We use the current 5-year New Zealnd government bond yield to estimate the risk-free rate. - To estimate beta (1), we regress monthly Venus stock returns against monthly S\&P/NZX 50 index retums (over the last five years). We use the beta estimate obtained from the regression. To estimate the cost of debt (rb) we use the weighted average interest rate across all our different types of debt. We use book value of debt to determine the weights. The market value of equity (E) is based on Venus' current market capitalisation. The market value of debt (D) is based on Venus' total book value of debt