26 Jul WHAT IS THE MOST IMPORTANT PRINCIPLE TO BE CONSIDERED WHEN IMPLEMENTING THE COST OF CAPITAL?
1. What is the most important principle to be considered when implementing the cost of capital? Explain in detail with an example.2. Sao Paolo Foods is a Brazilian producer of breads and other baked goods. Over the past year, pro?tability has been strong and the share price has risen from R$15 per share to R$25 per share. The company has 20 million shares outstanding.The company’s borrowing is conservative; the company has only R$100 million in debt. The debt trades at a yield to maturity 50 basis points above Brazilian risk-free bonds. Sao Paolo Foods has a market beta of 0.7.If the Brazilian risk-free rate is 7 percent, the market risk premium is 5 percent, and the marginal tax rate is 30 percent, what is Sao Paolo’s cost of capital?
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