Question : Discussion : Determining the Cost of Capital
Your Learning Resources this week illustrated several methods firms can use for determining their cost of capital. These resources also highlighted how accounting practices and capital markets can influence a firm's cost of capital. Now that you have examined the ways firms determine their capital structure and cost of capital, consider how it is applied specifically at your organization. Where does your firm go for long- or short-term financing and why? When was the last time the firm issued new common equity and for what reason? If the organization where you work is not publicly traded, has it issued private equity or private stock to new investors or partners? Not all companies do this in quite the same way.
To prepare for this Discussion, interview the CFO, finance director, treasurer, or another member of an organization who is knowledgeable about its finances. In this interview, discuss how the firm calculates its cost of capital, why it uses the methods it does, and how it is used to qualify investments or capital project evaluation. Finally, inquire about the capital markets the organization uses for short-term and long-term financing. Then postby Day 5your responses tothe following:
•A summary of your interview that includes who you interviewed, a brief description of his or her role and responsibilities within the organization, and how the interview was conducted (by phone, face-to-face, a series of e-mails, etc.).
•An explanation of how the firm determines the cost of capital specifically, why it uses the methods it does, how it is used to qualify investments or capital projects, and the capital markets the organization uses for short-term and long-term financing.
•Based on your readings this week, your interviews, and your experience, an explanation of the strengths and weaknesses of the organization's current method to calculating its cost of capital. Then, suggest some specific avenues the organization can take for potential improvement.
In your post, use caution concerning confidential information. Be careful not to reveal any information that could harm the firm or any individuals associated with the firm, including you. Use pseudonyms for the firm and individuals to protect identities, and err on the side of caution in revealing any details.
General Guidance on Discussion Posts: Your original post, due by Day 5, will typically be 3-4 paragraphs in length as a general expectation/estimate. Refer to the Week 6 Discussion 2 Rubric for grading elements and criteria. Your Instructor will use the rubric to assess your work.
Read a selection of your colleagues' posts.
Respond by Day 7to two or more of your colleagues in one or more the following ways:
•Provide feedback to a colleague's explanation of cost of capital and discuss similarities and differences between the other firm's approach and that of your firm.
•Share any promising ideas you learned from reading your colleague's post with regard to improving your firm's approach and inquire how the colleague would go about implementing the potential improvement.
General Guidance onDiscussion Responses: Your response, due by Day 7, will typically be 1-2 paragraphs in length as a general expectation/estimate. Refer to the Week 6 Discussion 2 Rubric for grading elements and criteria. Your Instructor will use the rubric to assess your work.
Readings
•Apergis, N., Artikis, G., Eleftheriou, S., & Sorros, J. (2012). Accounting information, the cost of capital and excess stock returns: The role of earnings quality-evidence from panel data.International Business Research,5(2), 123-136.Retrieved from the Walden Library databases.
•Barth, M., Konchitchki, Y., Landsman, W. (2013). Cost of capital and earnings transparency.Journal of Accounting & Economics, 55,206-224.Retrieved from the Walden Library databases.
•Block, S. B., Hirt, G. A., & Danielsen, B. R. (2014).Foundations of financial management(15th ed.). New York, NY: McGraw-Hill [Vital Source e-reader].
•Chapter 11, "Cost of Capital" (pp. 343-381)
•Chapter 14, "Capital Markets" (pp. 454-474)
•Chapter 16, "Long-Term Debt and Lease Financing" (pp. 505-544)
•Chapter 17, "Common and Preferred Stock Financing" (pp. 545-575)
•Faulkender, M., & Petersen, M. (2012). Investment and capital constraints: Repatriations under the American Jobs Creation Act.Review Of Financial Studies, 25(11), 3351-3388.Retrieved from the Walden Library databases.
•Jacobs, M. T., & Shivdasani, A. (2012). Do you know your cost of capital?Harvard Business Review,90(7/8), 118-124. Retrieved from https://cb.hbsp.harvard.edu/cb/pl/27828438/27829170/f15d2b775d42a24bc04061228866f6bd