Interview Question - Higher cost of capital?
Got the following question. You have company X, very stable and has been around for a long time, and you have company Y, a startup. Which company has the higher cost of capital?
I'm curious whether I got this one right.
Thanks!
I say X b/c they are not as borrowing as much in terms of monetary amount in terms of commercial paper
in terms of interest I say small businesses bc all i hear is banks are not lending
Company Y is going to have a higher cost of capital primarily because it does not have a credit history and therefore likely can't access the credit markets to the same extent (and at the same prices) at which Company X can. Without knowing anything about industry focus, etc, I would assume the cost of equity is the same for each Company, though you could make an argument that Company X being "stable" would lead to a lower Beta and therefore a lower cost of equity as well.
shit i think sclid is right when I seen company X i automatically thought corporation and not mom and pop shops dope :(
Y has the higher cost of capital - you're asking about cost of capital right? not about freakin' commercial paper like the first poster said...I am amazed by comments like these....
For cost of capital, you could probably use the WACC for each company. The proven company that has stable cash flows will have a good credit rating and be able to take debt out at a low price. On the equity side, the stable company's Ke could be computed by the CAPM - I'd imagine the beta is lower than a start-up...depends on the industry though but if its a stable company and its stock is more stable than the other company, the beta is probably lower.
For the start-up, the cost of equity is higher if its beta is higher - which it may be (this is a broad assumption though and depends on its industry, whether its private/public, etc.)....but for cost of debt, I mean banks or lenders will charge a higher amount because it isn't as credit-worthy....
So, the stable company has a lower WACC
beta? How do you know the companies are publicly traded? b/c just STARTED companies issue stock first thing right?
also obama recently passed a small buisness bill
"The small-business bill signed into law by President Barack Obama Monday eliminates capital-gains tax for investors who put money into qualifying startups." - http://www.bizjournals.com/boston/stories/2010/09/27/daily11.html
How about you stay up to date on laws while you are in your cubical cruching numbers for 90 hours a weak d bag
Why are you on this forum if your going to talk shit on an analyst? And to your previous smartass reply, regardless of if the company is publicly traded or not you can derive beta by looking at public comps, unlevering their betas, finding the median, and relever using the company in questions debt and equity. And regardless of the capital gains tax they are going to still have a higher interest rate on their debt since they do not have stable cash flows resulting in a higher WACC.
WACC = [e/v] * Re + [d/v * rd ( 1 - tc)] where v = equities + debts
How the fuck did you figure out tax rate, market value of firms debt....etc etc etc etc etc
are you Houdini ?
cateris parabis
ok, you're right...just tell the interviewer that the startup has a lower cost of capital....
i agree that normally and about 99.9999% of time yes the new company would but the fact is you can't jump to conclusions with this limited information i mean why ask such an easy question in a job interview?
thats true, good point...you should probably probe and ask a few more questions to get more characteristics of the companies...probing questions are a good place to start with questions like these that are vague...
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