Question 4 (this question has two parts, a) and b)) ((3+3 + 2 = 8 marks)

Part a)

The following table shows firms from different industries in the Australian stock market.

Company Name Industry Life-cycle stage Cash flows

Tech Ltd Technology Introductory Highly Uncertain

Your Energy Ltd Utility Mature Certain

Tech Adv Ltd Technology Growth Uncertain

Which of the above firm(s) will be able to afford a high debt to equity ratio? Explain your answer.

Which of the above firms will have a high default risk if there is debt in their capital structure? Explain your answer.

Part b)

What are the main difficulties in calculating cost of capital for diversified companies? Explain your answer clearly.