Four Seasons Hotels and Resorts - General Meeting | Take the Quiz

How do you think, the current financial market conditions influence our financing framework?

Favorable conditions for external financing

Unfavorable conditions for external financing

Based on the classic trade-off would you say that the marginal benefits of tax outweigh the marginal cost of financial distress?

Marginal benefit of taxes outweight – increase leverage

Marginal cost of financial distress outweight – reduce leverage

Marginal benefit of taxes equal cost of financial distress – stable leverage

Task: Please calculate the expected cost of equity and debt with the given data. For the cost of debt a maturity of 10 years and a Zero-Coupon Bond can be assumed. Taxes can be neglected. You can do the calculations in teams.

E(Cost of Equity) = ca. 7.30% ; E(Cost of Debt) = ca. 8.03%

E(Cost of Equity) = ca. 7.30% ; E(Cost of Debt) = ca. 8.28%

E(Cost of Equity) = ca. 7.48% ; E(Cost of Debt) = ca. 8.00%

Different Result

Given the information about agency cost of equity and debt, what do you think might be more severe for our company?

Agency cost of debt outweigh agency cost of managerial discretion. Thus, our optimal capital structure should contain less debt.

Agency cost of equity (debt benefits) outweigh agency cost of debt. Thus, our optimal capital structure should contain relatively more debt.

Marginal benefits and cost of debt seem to be equal for our given capital structure. Thus, our security should not alter our capital structure.

Given the information about current and future profitability aspects of FS: How would you categorize our company?

Type A firm: existing profitable projects but lack of future profitable investment opportunities.

Type B firm: existing profitable projects and profitable investment opportunities.

Type C firm: no existing profitable projects but future profitable investment opportunities.

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