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(formerly known as RRI Energy), and GenOn Energy Holdings (foiinerly known as Mirant).41 Table 40 shows the market capitalization of these companies. For each of these companies, we estimated the return on equity, cost of debt, debt-to-equity ratio, and ATWAAC. Table 40 Market Capitalization of Merchant Generation Companies NRGEnergy, Inc. CRnOn Energy Inc (fka RRI Energy) Calpine C o y . GeiiOn Energy Holdings Inc (fka Mirant) Dynegy, Inc. Solme Bloomberg(201I). a. Reticm on Equity Market Capitalization /$Ill) $5,163 $1,467 $6,861 $1,271 $696 We estimate the return on equity (ROE), the retui-n that stockholders require to invest in a company, using the Capital Asset Pricing Model (“CAPM’) for each merchant generation company as shown in Table 41. The ROE for each company is the risk free rate for 1J.S. treasuries plus a risk premium, defined as a company’s beta multiplied by the market premium.42 We calculate the risk free rate of 4.3%using a 15-day average of 20-year U.S. treasuries as of April 2011.43We estimate a market risk premium of 6.5% based on an average of long-term equity risk premia of 6.7% and 6.3% from Ibbotson and Credit Suisse. 44 The company beta describes a company’s correlation with the market; we calculate each company’s beta using the S&P 500 over the last five years.4s 4’ 42 43 44 Mirant and F Wmerged in December 2010 to form GenOn. Our analysis spans the time period before and after the merger, prior to which RRI and Mirant are tracked as separate companies and after which our reported results reflect the performance of the merged company. See GenOn (2010). Brealey, et nl. (201l), p. 193. Treasury yields of 4/27/2011 from Bloomberg (201 1). Ibbotson (201l), Table A-1 and Dimson, et 01. (2010), Table 10. 45 The security’s beta is measured as the covariance of the stock price and market index divided by the variance of the market index. A beta of 1 implies that, on average, when the market moves 1%, the company’s stock moves 1% as well. A company with a beta of 2 is more volatile because, on average, its share price moves 2% with a 1%move in the market. We calculated betas for each company by averaging S-year weekly betas starting Mondays, Wednesdays, and Fridays . 36PDF Image | THE APPLICATION OF KENTUCKY POWER
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