Question

Need some assistance with a Corporate Finance question:

what factors affect the cost of money. Use at least one outside source to support your reasons. Synthesize the data using critical thinking skills.

Answer 1

The factors that affect cost of money are :

1. Investment opportunities: Ability to pay interest depends upon how profitable the business is. The better the investment the better the payout of interest rate.

2. Time preference for consumption: The time frame for which the investor wants to invest, will lead to different interest rates. For eg a person retiring will expect safe returns although lower rate of return.

3. Risk: Risk and return are directly related to each other. Higher the risk higher is the return expectation and vice versa. Thus a high risk business will have a high cost of money.

4. Inflation: If inflation is expected to increase then the demand for returns will also increase, as the future value of money should beat inflation rate. Thus in case of rising flatiron the cost of capital is high and vice versa.