Cost of Capital

The research presented in this paper is to help explain the capital costs generated by corporations when raising funds to support company growth and future market share. These costs incurred are known as capital costs which can be estimated through cost of equity by using the dividend growth model approach or the security line approach. Each method will be discussed including their advantages and disadvantages. This paper will also explain the cost of debt, cost of preferred stock, and the weighted average cost of capital with tax adjustments. Finally, there will be a summary concerning the costs associated with the raising of capital funds for corporations regarding their investors such as preferred stockholders, stockholders, and bondholders.

The old saying, “It takes money to make money” hold true for individuals as well as corporations. There are times when companies foresee how certain investment projects necessitate the need to raise capital either through corporate loans or the sale of company stocks or bonds in order to position for future supply and demand. If the company is considered to have good value, then there are plenty of investors willing to provide funds for those investment projects, but not without costs to the company known as capital costs or cost of capital. These costs associated with the use of outside funds have financial implications regarding company profits needed to meet investors and owners return expectations while maintaining good value. Before a company can make a financial decision to increase outside funds, they must first calculate the costs that will be incurred by the company to acquire those funds. If a company decides to sell common stock to raise capital, the costs to the company ...

... middle of paper ...

...intaining good market value. The main focus for a corporation will always be to maximize profits while minimizing debt.

Works Cited

(2008). Retrieved February 25, 2014, from FinPlan.com: http://finplan.com/invest/divgrowmod.asp

(2014). Retrieved February 25, 2014, from Investing Answers: http://www.investinganswers.com/financial-dictionary/stock-valuation/cost-equity-2476

Jan, O. (2013). Accounting Explained. Retrieved February 26, 2014, from AccountingExplained.com: http://accountingexplained.com/misc/corporate-finance/wacc

Peavler, R. (2014). Business Finance. Retrieved February 26, 2014, from About.com: http://bizfinance.about.com/od/cost-of-capital/qt/calculate-the-cost-debt-capital.htm

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2011). Essentials of Coporate Finance (7th ed.). New York, New York, US: McGraw-Hill/Irwin. Retrieved January 19, 2014