Financial Risk and Reward
Watch the two videos listed below on the topics of financial risk and reward. Imagine you can interview the presenters and ask one question about financial risks and rewards. What question would you ask? Why do you feel that is an important question?
• What is Financial Risk- https://www.youtube.com/watch?v=-4mXnFK0ecM
• Investment and Consumption- https://www.khanacademy.org/economics-finance-domain/macroeconomics/gdp-topic/gdp-components-tutorial/v/investment-and-consumption
Discussion:
Cost of Capital
Corporations often use different costs of capital for different operating divisions. Using an example, calculate the weighted cost of capital (WACC). What are some potential issues in using varying techniques for cost of capital for different divisions? If the overall company weighted average cost of capital (WACC) were used as the hurdle rate for all divisions, would more conservative or riskier divisions get a greater share of capital? Explain your reasoning. What are two techniques that you could use to develop a rough estimate for each division's cost of capital? Your initial response should be 200 to 250 words.