Question
Samuel company, a toy retailer, is publicly listed in Hong Kong. The company is thinking of investing in natural gas wells in Russia. This would
Samuel company, a toy retailer, is publicly listed in Hong Kong. The company is thinking of investing in natural gas wells in Russia. This would be a five-year project. The CEO of the company has employed you as a financial manager for this investment project. Explain to the CEO the major considerations, methods and challenges in determining the required rate of return for this project. Explain if there would be any difference in the estimation of required rate of return for a private firm or a publicly traded firm. Explain also whether it is important to consider the issue of operating leverage in analysing this project. The CEO says The cost of capital depends on the source of the money, not the risk of the project. Do you agree? Explain and illustrate your explanation with example. (limit your answer to 450 words)
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