There are certain considerations that need to be made by the project division team in order to reduce risks conditions and improve potential of securing better rate of return. Projects are to be accepted only if its additional returns exceed the marginal cost structure. This concept is evaluated under the financial structure of weighted marginal cost of capital. Cost of capital is actually the opportunity cost of capital that company could have secured from other available alternatives provided same or lesser risk.
Ultimate desire of every shareholder is to have higher returns on their investments. “Your Net's” presence in internet service providing industry requires it focus on adaptive strategies for expanding its core business. Your Net is not in a financial position to fund all these projects. Therefore, a predictive analysis has been done using marginal returns and additional cost principle that are associated with the acceptance of these projects.
Your Net Company has alternative to select one or all of the projects presented by the Project division team. However, seeing the sensitive financial position of the company it is necessary to make prudent judgments to back the financial position of company. Weighted Marginal Cost of Capital analysis has been conducted as a systematic approach to the analysis of projects (Moyer, 2008). An incline is observed in the average cost of capital of firm as it opts for accepting new projects (Besley, 2007). Considerable incline is observed in the cost structure to finance new projects that requires compensating for additional risks associated with the additional burden of cost on company (Bierman, 2009).
This analysis has been done under the assumption that business risks and financial risks will remain unchanged throughout the period included in the study. In addition to that, after-tax cost of capital framework has been used to make capital budgeting decisions. Considerable attention has been paid towards the current financial structure of company, as in short-term company is having low liquidity position due to low cash level at bank along with low level of current assets. In WMCC analysis, current capital structure of company has been maintained in the following proportion.
Source of Capital
Weighted Marginal Cost of Capital (Foreign Investor)
WMCC Weighted Marginal Cost of Capital is basically similar to WACC except that it is only based on the additional value that is to be injected in the financial capital of business or activity. It mainly concerns with examining the marginal returns and marginal cost structure of funds that is to be injected in the business (Kim, 2006).
Different factors are considered in evaluating the marginal cost of capital for common equity, preferred equity, and debt. This includes cost of each financing mode, tax-rate, and return to be paid and expected by the lender and shareholder. This increases the potentiality of burden on company when it needs to decide which of the best possible project they should choose (Brigham, 2010). Similar is the case with Your Net Company where company's current financial resources are not allowing ...