Evaluating the cost of capital

Level: Undergraduate | Grade: 2:1 | Approx. Word Count: 1,400

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Overview

Corporations often require additional capital for expansion and growth purposes. For this purpose they can offer shares or corporate bonds to potential investors. However, the investor will need to evaluate the value of the capital invested and the potential risks attached based on the business asset value. The WACC and CAPM are two measurement models that can be used to achieve this objective 

It is apparent that for expansion purposes the majority of business organisations need to acquire capital (Brealey and Myers 2016). However, the issues that are faced by those investors considering investing in business organisations is determining a) how secure their investment is likely to be in the future, and b) that the investment will provide a suitable return for the investor (Melicher and Norton 2005).