Instructions 1) Original Post = 300 words 2) 3- Responses needed = each response should 150 words 3) 3 References 4) Citations with in the body Cost of Capital In the links below, you will explore how companies compute their cost of capital by computing a weighted average of the three major components of capital: debt, preferred stock, and common equity. The firm’s cost of capital is a key element in capital budgeting decisions and must be understood in order to justify capital projects. Cost Capital= For this Discussion, imagine the following scenario: You are the director of operations for your company, and your vice president wants to expand production by adding new and more expensive fabrication machines. You are directed to build a business case for implementing this program of capacity expansion. Assume the company’s weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work with your staff on the first cut of the business case, you surmise that this is a fairly risky project due to a recent slowing in product sales. As a matter of fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital. An enterprising young analyst in your department, Harriet, suggests that the project is financed from retained earnings (50%) and bonds (50%). She reasons that using retained earnings does not cost the firm anything since it is cash you already have in the bank and the after-tax cost of debt is only 7%. That would lower your weighted average cost of capital to 3.5% and make your 10% projected return look great. Based on the scenario above, post your reactions to the following questions and concerns: What is your reaction to Harriet’s suggestion of using the cost of debt only? Is it a good idea or a bad idea? Why? Do you think capital projects should have their own unique cost of capital rates for budgeting purposes, as opposed to using the weighted average cost of capital (WACC) or the cost of equity capital as computed by CAPM? What about the relatively high risk inherent in this project? How can you factor into the analysis the notion of risk so that all competing projects that have relatively lower or higher risks can be evaluated on a level playing field? Reponse-1(Ray) I think Harriet has a good suggestion because since it is cash you already have in the bank and the after-tax cost of debt is only 7% that is a bad deal in the big picture and could end up being much cheaper. This process could end up lowering financial cost; you can also be able to make periodic payments. These on going payments allow the company to keep some of their profits because they are only required to pay what they owe. There are also some benefitting rules with regards to taxes for the use of debt payments. According to investopedia Weighted average cost of capital is used to access an investors’ return on investment.  “The average after-tax cost of a company’s various capital sources, including common stock, preferred stock, bonds, and any other long-term debt.” Cost of equity determines the rate of return on a project. I think the project should use the Weight of average of capital because it is used as a good appraisal to proceed or not proceed in a new project and is good for doing comparison with other firms. Risk is crucial part of business that you must pay attention too, with regards to cost of capital I did some research on it and according to an article on small business chronicle they gave some advantages to risk. With regards to risk you need to pay attention to the spending of capital, you need to have a right evaluation of what you are spending is worth it. An economic condition of the country is important because it can affect a company. The corporate cash flow is so…

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