Financing Costs

Question 1

Companies seek the lowest average rate of financing costs to capitalize the business. Common sources of financing are as follows:

• Common stock equity
• Preferred stock equity
• Bond debt

Explain how the following risks may affect these 3 sources of financing in international capital markets. In addition, explain how these risks may influence a company’s international weighted average cost of capital (WACC):

• Default risk
• Inflation
• Interest rate risk
• Stock and market volatility

Question 2

Salvador Corporation made an investment in Letter.com, Inc., in exchange for 100,000 options to purchase Letter.com’s stock at $20 per share. Since the stock options are not marketable, Salvador’s management has this derivative valued by a security appraiser. The appraiser uses an option-pricing model to determine the fair value of the derivative for the financial statements. Describe how you would audit the valuation of the stock options.

Question 3

1. Explain how an investor chooses the best portfolio of stock to hold.

250 words with APA reference