Question

Identify the effect of financing strategies on cost of capital.

Answer 1

Cost of capital refers to the opportunity cost of raising fund for an organization.

Financial strategies play very crucial role in determining the cost of capital of business.

If management want to be high levarage then it's debt is high and it's cost of capital is also high in that situation.

But a management who think about lower leverage in that case they believe on equity and other funds having low cost of capital.

If company want to issue of debt in such a situation cost of capital is more & the interest expense will result into saving of tax.

But if company want to raise fund through equity then their is chances that ownership may be changed bdue to change in shareholding.

So different strategies impacts the cost of capital in different ways.