Financing Costs in Business
please see question below
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
Answer preview
- Default risk
Default risk is a scenario in which the business is unable to make the payments that are required of them at the right time by the creditors. Default risk affects the preferred stocks in that the business when it is experiencing a default risk it is not is able to pay the dividends for the preferred stock. The common stocks are normally taken care of after the preferred stocks, so if there is not enough cash flow, there is no money to pay for the common stocks…
(700 words)