The Strategy Skills Podcast: Strategy | Leadership | Critical Thinking | Problem-Solving

484: How too much debt impacts cost of capital (Strategy Skills classics)

Sep 18, 2024

Explore how debt levels influence the cost of capital, especially within state-owned power utilities. Discover the delicate balance between lowered costs through increased debt versus the risks perceived by credit rating agencies. Delve into the impact of government bailouts on these enterprises and their capital market relationships. Uncover the complexities of strategic financial decisions in the energy sector, navigating the challenges of funding in uncertain economic landscapes.

20:37

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Quick takeaways

The cost of capital fluctuates as debt increases, highlighting the necessity for careful management of debt equity balances for financial stability.

A clear organizational vision is essential for strategic decision-making, guiding actions and enabling adaptation to challenges in transformative efforts.

Deep dives

The Importance of Vision in Strategy

The podcast emphasizes the critical role that vision plays in strategic decision-making, particularly for organizations involved in significant transformations. Without a clear vision, companies risk stagnation and failure. A strong, well-articulated vision guides actions and helps organizations adapt to challenges and seize opportunities. The speaker encourages listeners to reflect on their goals by asking, 'If today were the last day of my life, would I want to do what I am about to do today?' which underscores the need for purposeful decision-making.

Understanding Cost of Capital in State-Owned Enterprises

15min

Dynamics of Government Financing and Corporate Strategy in Energy Sector

5min

For this episode, let's revisit a Strategy Skills classic where we discuss how your cost of capital changes as you take on more debt and how this change is different between organizations. It's a crucial concept for this utility. We explain how the cost of capital change usually takes place and then we review the drivers at play that are different for this power utility vs. an average company.

Click here to see the full study and here to see the merger study and market entry study.

Watch the video version of this episode on YouTube: When too much debt is a good thing

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