corporate and global finance 10147373 2

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Assignment 2: The Cost of Capital

To expand operations, firms often require more funds than can be generated from operations. These additional funds require a long-term source of capital. There are two primary means of raising the required additional funds: borrowing the funds (bonds), or selling ownership (stock shares). There is a cost to the firm of raising capital using either method. The firm expects to receive a financial benefit from the assets acquired with the raised capital. To ensure the benefit outweighs the cost of the capital, the firm must determine with some accuracy the cost of the capital and compare it to the benefit to be received. Determining the cost of borrowing is straightforward. Calculating the cost of selling shares in the firm is more complex.

Do the following to complete this assignment:

  • Explain the cost of capital and how it is determined.
  • Explain the concept of the optimal capital structure and how it can be determined.
  • Explain the concept of financial leverage and analyze how it can affect capital structure decisions.
  • Provide an example of a highly leveraged firm and estimate the leverage’s effect when the firm is doing well, and when there is a downturn in sales.

Write a 2–3-page paper in Word format. Utilize at least three scholarly sources in your research. Make sure you write in a clear, concise, and organized manner; demonstrate ethical scholarship in accurate representation and attribution of sources; and display accurate spelling, grammar, and punctuation. Use the APA format.

Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M6_A2.doc.

By Wednesday, June 15, 2016, deliver your assignment to the M6: Assignment 2 Dropbox.

Grading Criteria

Grading CriteriaProficient
Maximum Points

Explain the cost of capital and how it is determined.

 

 

Description of the cost of capital and how it is determined is accurate, specific, and clear.

12

Explain the concept of the optimal capital structure and how it can be determined.

 

Description of the concept of the optimal capital structure and how it is determined is accurate, specific, and clear.

12

Explain the concept of the financial leverage and analyze how it can affect capital structure decisions.

Description of how a larger debt to equity ratios increases (leverages) corporate performance during profitable times, but decreases performance further during unprofitable times. Higher debt to equity ratios also increases risk.

16

Provide an example of a highly leveraged firm and estimate the leverage’s effect when the firm is doing well, and when there is a downturn in sales.

The example identified is accurate and relevant to the business world.

12
Writing Standards  

Write in a clear, concise, and organized manner; demonstrate ethical scholarship in accurate representation and attribution of sources (i.e. APA); and display accurate spelling, grammar, and punctuation.

Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; and displayed accurate spelling, grammar, and punctuation.

8
Total: 
60

 

This assignment requires a document deliverable. If you would like to review any of the Microsoft tutorials, click here.

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