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larger miners who could blend highere-iy producers' exports to China. Unlike Chinese requirement, small producers didn't have the financial resources to do so. All these risks were compounded by the condemnation by Greenpeace that coal mining was destabilizing the Indonesian economy, diminishing livelihoods, and exacerbating poverty The Investment Proposal Agus Halim invited his finance manager to discuss the acquisition plan with him. They thought the proposed purchase price of the mine was reasonable. The mine-verified mineable surface reserves were of medium quality and were estimated at 12 million tons. Agus figured they could easily produce at least one million tons from this t. The finance manager estimated that including the mine purchase price, the capital expenditure needed to get production started would be about US$30 million, with US$15 million outlay immediately after the deal was closed, and another US$15 million a year after. The working capital investment was estimated to be an additional $2.5 million a year starting in 2015. Besides capital costs, there were also coal-mining expenses including employee-related costs, internal and external coal transportation costs, blasting, drilling, and other mining-related costs. Additionally, there were expenses related to ash disposal. The finance manager estimated that operating expenses would total US$25 per ton, and would increase at a rate of 5% per year. To determine if the investment would create valuc for the firm, the finance manager needed to first esti- mate the weighted cost of capital (WACC) for this investment. WACC is calculated by weighting cost of debt and cost of equity, with the proportion of capital in debt (D/(D+E) and the proportion of capital in equity (E/(D+E), respectively. D+E p cost of debt fe cost of equity D value of debt E- value of equity corporate tax rate The finance manager figured he could get the bank to finance $12 million of the capital cost with a 10-year term loan at 14% annual interest rate, completely drawn down in 2015. The other $18 million plus $2.5 mil- lion working capital investment would come from cash in hand and equity injection from the parent firm. To estimate the cost of equity, also called the required rate of return for the owners, the finance manager believed the best way was to use the Capital Asset Pricing Model (CAPM). CAPM stipulates that the required rate of return for the equity holders for this investment varies in direct proportion with the systematic risk called beta (B). r -cost of cquity R, current government benchmark interest rate B beta of the investment R-R,- equity risk premium

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