Question 2: Consider the financial-market imperfection model with asymmetric information. The firm needs one unit of capital to start a project that will produce y distributed uniformly over [0, 2y]. The firm owns W<1, and needs to borrow 1-W from the bank. There are infinite number of banks providing infinite amount of capital. The risk-free interest is r. We assume p1+r. 1) Suppose both the firm and the bank can observe y perfectly. Can you propose a feasible contract that makes borrowing possible? 2) Suppose the bank can only observe y with a cost C. Can you propose a feasible contract that makes borrowing possible? You can make your own assumptions on parameter values. 3) Based on your answer to 2), mark the area in a W-y diagram that represents the collection of (W, y) value combinations with which an investment project will be funded.
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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