Week 4 Discussion Questions

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Week 4 Discussion Questions
What are main elements in calculating the cost of capital? How does an increase in debt affect it? How do you identify an organization’s optimal cost of capital? •The main elements in calculating the cost of capital are cost of debt, cost of equity, preferred stock and common stock. •An increase in debt indicates a higher risk which can increase the required rate of return which raises the cost of capital. Higher debt can also accrue additional costs. •By mixing the permanent sources of funds used by the organization that will maximize their common stock price or searching for the funds mix that will minimize the organization’s composite cost of capital.

What is meant by WACC? What are some components of WACC? Why is WACC a more appropriate discount rate when doing capital budgeting? What is the effect on WACC when an organization raises long-term capital? •WACC stands for the weighted average cost of capital which is a weighted average of all costs incurred by the organization. •Some of the components of WACC are various sources of capital such as bonds, preferred stock, and common equity, including retained earnings. •WACC is a more appropriate discount rate when doing capital budgeting because it uses after tax costs and the weights show the entire amount of financing on a percentage level. This gives the company the knowledge of what rate of return it needs to satisfy stockholders and creditors. •Raising long term capital leaves a chance for rates of maturity to change making the company look for risk free rates. The company would need to make sure they can meet the risk and the changing required rate of return as well as the changing rates that affect costs and fees.

What is an IPO? How does an IPO allow an organization to grow financially? When is a merger or an acquisition, instead of an IPO, more appropriate? •An IPO stands for Initial Public offering. It is the first time a company’s stock is sold to...
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