Analyzing Cost of Capital

Analyzing Cost of Capital

Introduction

When raising funds for certain investment projects, the main aim is to earn a reasonable profit on the investment, in order to satisfy investors and stakeholders. While making an investment decision, it is important to state the minimum rate that company would be earning from the particular project sequentially to increase the internist of the potential investors. Hence, the analysis of cost of capital is essential for companies as it shows the minimum rate that company will be earning and paying to the suppliers of the funds for the investment project. This paper will focus providing guidelines on analyzing Genesis's cost of capital.

Discussion

Without providing cost of capital, the worth of the investment project cannot be further proceed since it is use as a discount rate which indicates future value of cash flows linked with the capital projects. Sensible Essentials decision of financing project through both debt and equity is much preferable considering the balance fact between both the financing. As both these financing has benefits and drawbacks. When analyzing the cost of capital, three main methods are crucial; Cost of New Debt Capital, Weighted Average Cost of Capital, and Marginal Cost of Capital. Project must earn minimum rate which is termed as cost of capital for covering the cost that has been incurred for raising the fund for investment. Companies usually acquire or borrow money from the different sources available in the market along with their own portion of investment as well. There are two phases comprises of economic and operational term. In operational term, it is the used as a discount rate for the purpose of knowing the present value of projected future cash flows and finally taking decision on the projects worthiness whether to opt for it or not.

Whereas, an economic term is concern, it has been further alienated into two classes. Initially, cost of capital is the cost that is connected with the obtaining funds to finance the suggested project. In order words, firm's rate of borrowing. Lending rate is concern with the fund's opportunity cost. In order words, the chances of earning profit trough investment in other projects. Considering both the cases, cost of capital implies the return rate prevailing in the market and anyone approaching capital from market, this rate has been paid (Chandra P., 2011).

Weighted Average Cost of Capital is a cost of capital where a ...