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Explain with examples how the cost of capital is determined

Cost of capital is the return thats necessary to make a budgeting project, such as expanding. The cost of capital includes the cost of debt and the cost of equity (Investopedia, 2018). When using the Weighted Average Cost of Capital, the cost can be determined by calculating the cost of debt capital, tax deduct the interest expenses then determining the after tax cost of capital. We would use the CAPM (capital asset pricing model) to determine the Cost of equity capital:

Risk Free Asset + (beta/risk premium) = CAPM

(Equity/cost of equity) + (debt/cost of debt) = Cost of Capital

Calculate the differences in cost and risk. Explain why the costs and risks of external financing are important for the organization to understand

Day to day cost is what will be spent for your business to run successfully and sustain its assets. Decision makers must understand the costs and risks of financing for their business, especially when determining which financial option is suitable for their project.

Cost/Threat/Vulnerability= RISK

Explain why rapid growth plans are important to a small company. Would there be a more efficient way to fund a growing company?

Rapid growth plans help companies compete with others in their industry. Rapid growth plans can help with building a positive customer base, increase shares, increase profits and sales and technology. A company like Genesis can benefit greatly by using debt financing to gain the needed capital that would allow them to expand.

Staff, I. (2018, January 18). Cost of Capital. Retrieved March 03, 2018, from https://www.investopedia.com/terms/c/costofcapital.asp