Determine the Amount of financing required
The last factor determining company's cost of funds is the amount of financing required, where cost of capital increases as the financing requirements become larger. This increase can be attributable to one of the two factors:
As increasingly larger public issues are increasingly floated in market, additional flotation costs (costs of issuing the security) and under-pricing will affect percentage cost of the funds to the firm.
As management approaches market for large amounts of capital relative to firm's size, investors' required rate of return may rise. Suppliers of capital become hesitant to grant relatively large amounts of funds without evidence of management's capability to absorb this capital into the business.
Usually, as the level of risk rises, a larger risk premium must be earned to satisfy company's investors. This, when added to the risk-free rate, equals firm's cost of capital.