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Cost of Capital for Finance Households

Suppose that you were a member of Enron's board of directors from 1987 to 2000. Investors such as short-seller James Chanos of Kynikos Associates Ltd. estimated that Enron's cost of capital was between 9 and 12 percent, but its return on capital was closer to 7 percent. As a director, how would you use information about the cost of capital? As part of your answer, refer to Exhibits 9.1 to 9.3, and think about being a board member in two different time periods, 1987-1994, and 1995-2000.

Next, put yourself in the position of Andy's spouse in the "lemon" parable that describes the nature of Enron CFO Andrew Fastow's use of off-balance sheet partnerships. Suppose that you asked Andy enough questions to ascertain that he had sold his lemon car to Mike at an inflated price and loaned him the money to do it. As someone concerned about your household's finance, what other questions would you have for Andy?

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Cost of Capital
Suppose that you were a member of Enron's board of directors from 1987 to 2000. Investors such as short-seller James Chanos of Kynikos Associates Ltd. estimated that Enron's cost of capital was between 9 and 12 percent, but its return on capital was closer to 7 percent. As a director, how would you use information about the cost of capital? As part of your answer, refer to Exhibits 9.1 to 9.3, and think about being a board member in two different time periods, 1987-1994, and 1995-2000.

Next, put yourself in the postion of Andy's spouse in the "lemon" parable that describes the nature of Enron CFO Andrew Fastow's use of off-balance sheet partnerships. Suppose that you asked Andy enough questions to ascertain that he had sold his lemon car to Mike at an inflated price and loaned him the money to do it. As someone concerned about your household's finance, what ...

Solution Summary

The cost of capitals for finance households are examined.

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