Question

Describe some factors that are generally beyond the firm’s control but still affect the cost of capital? In addition, explain how would you determine the cost of capital for a firm with multiple divisions that each have different risks.

Initial Post Length: minimum of 500 words.

Answer 1

The cost of capital is the company’s fund that represents the return rate that could be expected to earn in alternative investment. It includes the cost of debts, cost of equity share capital, preferences share capital, etc.

The factors that can affect the cost of capital beyond the firm's control are:

Taxes

Tax rules and the regulations from the government is one of the factors that affect the cost of capital beyond the control of the business

Investors risk aversion

Investors which prefer lower risk rather than higher returns that is known as the risk-averse and risk-averse factor is another factor that is beyond the control of the business or which affects the cost of capital because the choice of investor is beyond the firm.

Market conditions and state of the financial market

Debt capital means when we borrow the funds from the various channels to run business and the different marketing conditions affect the cost of capital which is beyond the control of the firm.

The following procedure is used to determine the cost of capital for a firm with multiple divisions that have different risks are:

The subjective adjustments to the firm’s composite WACC(Weighted average cost of capital)

Pure play is an approach in which several publicly traded companies are finding exclusively and in the project of the business and then the average of betas as proxies for the project’s beta.

If the division were stand-alone firm that is attempted to estimate what would be the cost of capital

The accounting approach is the approach in which the regression is run between the ROA(Return on assets) of the project tan the index ROA. The accounting approach is correlated with the market. However, normally the data cannot be accessed before the capital budgeting decision is made.