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RIPHAH INTERNALTIONAL UNIVERSITY

Assignment No:2

Subject: Strategic Finance

Name: Hassan Nawaz


CMS No:400638

Submitted To: Dr Sajjad Nazir

1. What are different sources of capital for a company?


Every business requires capital investment. Start-ups require capital to buy
assets to establish themselves and provide working capital until them breakeven, while existing businesses often seek capital for expansion or
diversification.

Business lenders
Family and friends
Venture capital firms
Lease

2. What is the cost of capital from each source?


Cost of capital is the cost an organization pays to raise funds, e.g.,
through bank loans or issuing bonds. Cost of capital is expressed as an
annual percentage.

Weighted average cost of capital WACC


Cost of borrowing
Cost of debt
Cost of equity COE

3. What is WACC?
Weighted average cost of capital WACC is the arithmetic average
(mean) capital cost, where the contribution of each capital source is
weighted by the proportion of total funding it provides. WACC is usually
expressed as an annual percentage.
4. How cost of capital can be calculated?
Once cost of debt and cost of equity have been determined, their
blend, the weighted average cost of capital (WACC), can be calculated.
This WACC can then be used as a discount rate for a project's projected
cash flows.
5. What is the usage of cost of capital?
From a company's point of view, the cost of capital refers to the cost of
obtaining fundsdebt or equityto finance an investment. The cost of
capital is used to evaluate new projects of a company, as it is the
minimum return that investors expect for providing capital to the
company.

6. Significance of cost of capital?


Cost of capital is considered as a standard of comparison for making
different business decisions. Such importance of cost of capital has
been presented below.
Making Investment Decision
Designing Capital structure
Evaluating the Performance
Formulating Dividend Policy
7. Impact of high/low cost of capital on firm?
In order to build new plants, buy new equipment, develop new
products, and upgrade information technology, businesses have to
have money or capital. For every decision like this, a business owner or
Chief Financial Officer (CFO) has to decide if the return on the
investment is greater than the cost of capital or the cost of the money
it takes to invest in the project.
Business owners do not usually invest in new projects unless the return
on the capital they invest in these projects is greater than or at least
equal to the cost of the capital they have to use to finance these
projects. Cost of capital is the key to all business decisions.