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 job concern owners and senior management brass instrument can be categorized as investment opportunities. Whether building a new facility, taking over another business 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 finance, and since the method of finance that is employed by a fussy firm defines their embody of capital (which in turn affects the quantity of investment undertaken), it is taken for granted(predicate) that the investment and finance decisions of the firm are inexorably link up (Brewster, 1999). Finance can be raised internally and externally by a firm. The tw o main external sources of finance allow equity (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, plainly 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 put to death their picky investments. The cost of capital is the rate of return that a company mu st earn on an investment to preserve the va! lue of the company (Belk, 2004). To borrowers, it is the rate of return required attracting potency investors and obtaining required capital, and to suppliers of money, it is an opportunity cost or the return procurable on investments of a sympathetic risk. The cost of money is in general determined by the transposition of capital in... If you want to modernise a full essay, rewrite it on our website: OrderEssay.net

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