Topic_08_E1

Topic_08_E1 - Topic 8, Exercise 1 Cost of Capital The...

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Topic 8, Exercise 1 Cost of Capital The high-flying Enron Corporation dominated the financial news in the last few months of 2001 and early 2002. The company experienced a collapse in its stock price that was breathtaking. A BusinessWeek article, Enron’s “Contagion Effect,” discusses the spillover effect of this event on other firms’ cost of capital. After reading this article, answer the following questions: 1. What is the problem related to lack of disclosure that may affect other companies? Enron had a very complex set of financial arrangements that included limited partnerships and off-balance sheet financial arrangements. Enron’s failure shook the market’s confidence about the truthfulness of financial disclosure. While Enron’s disclosure problems are enormous, other examples, such as Sunbeam Corp. and Waste Management Inc., have also caused the market to be very skeptical of all
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