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(Answered) Company's Cost of Capital


Please need help formulating a complete and thorough response to the following questions;1. Why is the cost of capital such a vital input when determining a company's capital structure?;2. How does this affect their decision making process?;3. How is the cost of capital derived?;For the 1st question, it is my understanding that one of the most important business concepts is the weighted average cost of capital to estimate a company's inherent worth and to determine whether the company's stock is a bargain. I am not sure how this would works.;For the 2nd question, I believe that the cost of capital can manipulate and alter the decision making processes for a company via numbers. As a result, the company is impacted in terms of profitability as a whole.;For the 3rd question, while I am not so sure but nevertheless I believe that at least at some point the cost of capital is derived from the issue of new common stock which I think is a part of three components: the cost of debt, the cost of perferred stocks and the cost of equaity.
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Company's Cost of Capital

 


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