Subject matter must be directly related to the financial issues Essay

Subject matter must be directly related to the financial issues covered in the course.the sourse of your analysis should be from - Essay Example However before one chooses a particular fund source he/she needs to consider a number of factors with the first one being the risks associated with fund source. The organization in need of finance should also evaluate the kind of relationship they are likely to engage with the potential funder and most importantly, the costs associated with the financing requirements. The cost of fund source is an important consideration for an organization when in need of raising additional funds. The cost of capital, which is the cost of funds to be used for financing an operation undertaken by the organization can be understood from three main perspectives namely investor, company and mode of financing. From an investor point of view, cost of capital refers to the opportunity cost of choosing a particular investment over others. Most investors with a diversified portfolio often have a wide array of investment opportunities where they can invest their money but they often opt for a specific investm ent. Pratt and Grabowski (2010) assert that the decision to invest in a specific investment often made based on the rate of return earned over that specific investment compared to others. ... The rates of return from ABC inform of bond interest and UVW which is inform of divided will play a critical role in informing the investors decision to make investment especially if they are of similar risk considering that each comes with its own opportunity cost. In other words, cost of capital is comparable to the internal Rate of return (IRR) which measures the desirability of a wide range of projects. From a company perspective, cost of capital refers to the measurable cost of acquiring funds from a particular source in order to finance a particular project. For instance, company that uses loan from a bank to finance its projects, its cost of capital will be the money needed to compensate the bank inform of loan interest. Armitage (2005) elucidate that cost of capital is a crucial benchmark for making financial decisions relating to investments in a new project by companies. This is because it forms the minimum amount of return that the owner of funds will require before issuin g funds to the company inform of capital. In other words, the company must be able to pay the cost associated with a particular fund source before acquiring funds. This means that the returns from the project to be financed must be higher than the average cost of obtaining the capital to finance it. Companies are known for borrowing money to finance different projects such as expansion programs, product development, and purchase assets and they often cost of acquiring funds as their basis for project evaluation as projects with low returns and high cost of finance cannot be financed (Lumby & Jones, 2003). For instance an organization that