Question

California Electric has a cost of equity 16 percent. the firm consistently been authorized a return on equity capital below this cost. Also, the effects of regulatory lag and attrition have further reduced the realized return to the 13 percent range. If the utility expects this problem to continue, what actions would you expect Cal Electric to take as a result?

Answer 1

If the utility expects this problem to continue, we would expect Cal Electric to take steps to increase net income and increase market value of its stock to increase return on equity and decrease cost of capital.