Question

Discuss how a company can make strategic changes that will change their cost of capital. These changes can be positive or negative and increase or decrease the cost of capital. Also discuss what variable(s) the company has no control over to effect change in the cost of capital and why this is the case.

Answer 1

A company can have control over its internal factors which affect the overall cost of capital. The company can modify its methods of conducting various operating business which will help in cutting of its cost of capital which will ultimately help in maximization of profit.

Company can reduce its uses of equity if the return on capital of the company is higher than the overall cost of debt. In such scenario, the difference between the return in cost of debt and return on overall capital will lead to the growth rate of the company. So a company should organise its operations in an effective and efficient way which will minimise the cost of capital and maximize the overall rate of return.

The changes could be changein different kind of technology and workforce which will help in reducing the overall cost of operations does leading to reduction in cost of capital and increasing the return of overall capital.

Company has only control over its internal factors such as the decision regarding the management, decisions regarding with its employees, decisions regarding to technology, decision regarding adherence of different rules.

A company has no control over market forces such as interest rates and rate of inflation as well as the exchange rate risks which can lead to overall increase in cost of capital thus, affecting negatively the overall rate of return.

The company should always try to reduce its cost of capital and maximize its return on capital in order to expand and grow bigger.