Consider following three companies: (i) Gasco owns and operates a chain of gas s

Question

Consider following three companies: (i) Gasco owns and operates a chain of gas stations in the northeast USA. (ii) Fuelco is a pre-revenue company that is attempting to develop new fuel cll technology to replace the internal combustion engine. (iii) Combco combines the operation of Gasco and Fuelco. Use qualitative reasoning to order the cost of capital for these three companies from lowest to highest. (There is more than one reasonable way to answer this question, but there are also wrong ways to ansewr).

Explanation / Answer

From lowest to highest

1. Gasco

2. Fuelco

3. Combco

Gasco has the lowest cost of capital followed by fuelco and then combco.

Since Gasco is only managing the operatimg cost of the gas stations and not investing in the new R&D of fuel cell, it can be the lowest cost of capital.

Fuelco is investing in the new fuel. Cell development, it costs a lot in investing the R&d of any product and it is usually higher than the operatuon cost.

Since combco. Is investing in both (operations and R&D) it can have the highest cost of capital

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