The Cost of Capital is a Critical Element in Business Decisions

The Cost of Capital is a Critical Element in Business Decisions Ameri potentiometer Public University System FINC 600 Corpo deem pay Many of the critical decisions that blood line owners and senior management seem can be categorized as enthronisation opportunities. Whether create a new facility, taking over another melody or expanding their investment portfolio, managers and owners atomic number 18 oft making investment decisions that plaster bandage their businesss future. Investment in gravid assets naturally requires some diverseness of pay, and since the method of pay that is employed by a fussy firm defines their diagnose of capital (which in turn affects the quantity of investment undertaken), it is clear that the investment and finance decisions of the firm are inexorably connect (Brewster, 1999). Finance can be raised internally and outwardly by a firm. The two main external sources of finance allow e quity (the issuing of ordinary and preference shares) and debt (issuing of bonds, debentures, short-term loans).

A companys shareowner funds are an example of internal financing, tho typically the prime source of internal funds for investment purposes is the companys hold brightenings. The relative costs of these funds may vary, depending on the ordinary market conditions. Therefore, the aim of management or business owners is to baffle the most efficient mix of these funds in crop to obtain the optimal capital structure with which to attain their picky investments. The cost of capital is the rate of return that a company must earn on an investment to watch over the value of the company (Belk, 2004). To borrowers, it i! s the rate of return required attracting voltage investors and obtaining required capital, and to suppliers of money, it is an opportunity cost or the return acquirable on investments of a sympathetic risk. The cost of money is chiefly determined by the transposition of capital in... If you want to pull in a full essay, rewrite it on our website: OrderEssay.net

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