1. What is the most important principle to be considered when implementing the cost of capital? Explain in detail with an example.

2. Sao Paolo Foods is a Brazilian producer of breads and other baked goods. Over the past year, protability has been strong and the share price has risen from R$15 per share to R$25 per share. The company has 20 million shares outstanding. The company's borrowing is conservative; the company has only R$100 million in debt. The debt trades at a yield to maturity 50 basis points above Brazilian risk-free bonds. Sao Paolo Foods has a market beta of 0.7. If the Brazilian risk-free rate is 7 percent, the market risk premium is 5 percent, and the marginal tax rate is 30 percent, what is Sao Paolo's cost of capital?