Question

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

Answer 1

Risks refer to an organization’s ability to manage its debt and financial leverages. Costs will refer to whether or not a company will be able to make enough profit to sustain its operational costs.

A company must have a robust understanding of both of these of external financing. It needs to have an understanding before making any decisions when it comes to the cost and the risks of the company. The organization must have payment strategy already in place from the beginning. Understanding this will make the company take on good debt and not bad debt. Taking on good debt will make the company grow and become more successful whereas taking on bad debt will have the opposite affect. Understand risk and costs will allow the company to make these types of decisions.