Company Electra S.A. is a local electricity company that is financed only with equity. According to the CAPM, the required return on equity of this company is 15%.
a) According to this information, what is the WACC of Electra S.A.?
b) This company is considering the possibility of an international expansion by investing in a power plant in Japan. This new project would be financed only with equity. This company wants to use the required return on equity of the company (equal to 15%) to value the new project. Would that be correct? What is the potential mistake that the company might be making? Assume that the investor is constrained in her diversification strategy and as such, it is not possible for her to further diversify her portfolio.