DiscussionAnalyzing Cost of Capital Essay Example | Topics and Well Written Essays - 250 words

DiscussionAnalyzing Cost of Capital - Essay Example In order to reduce this and attain an optimum capital structure the firm needs to determine the combinations of equity and debt that minimize the W.A.C.C. The effective use of that capital should also be considered, as there would be no need of accumulating large amounts of capital without necessary considerations of the projects that are supposed to be undertaken. The company should also consider the cost of raising the particular capital that it deems appropriate. This is measured by the marginal cost of capital. . To obtain finance a company will pay implicit costs which are commonly known as floatation costs (Rosemary, 2012). These include: Underwriting commission, Brokerage costs, cost of printing a prospectus, Commission costs, legal fees, audit costs, cost of printing share certificates, advertising costs etc. For debt there are legal fees, valuation costs (i.e. security, audit fees, Bankers commission etc.). The company needs to determine the combination of capital items that will minimize to a large extent the marginal cost of capital (M.C.C). The company also needs to consider leverage. This is the amount of debt used to finance a firm’s assets. A firm with significantly more debt than equity is considered to be more leveraged. A high degree of leverage increases the financial risk the company faces, as it may not be able to refinance such debt, leading to insolvency (Rosemary, 2012). An optimum capital structure needs has lower amounts of financial risk and sustainable levels of