Question: Discussion: Determining the Cost of Capital

Your Learning Resources this week illustrated several methods firms can use for determining their cost of capital. These resources also highlighted how accounting practices and capital markets can influence a firm's cost of capital. Now that you have examined the ways firms determine their capital structure and cost of capital, consider how it is applied specifically at your organization. Where does your firm go for long- or short-term financing and why? When was the last time the firm issued new common equity and for what reason? If the organization where you work is not publicly traded, has it issued private equity or private stock to new investors or partners? Not all companies do this in quite the same way.

To prepare for this Discussion,

interview the CFO, finance director, treasurer, or another member of an organization who is knowledgeable about its finances. In this interview, discuss how the firm calculates its cost of capital, why it uses the methods it does, and how it is used to qualify investments or capital project evaluation. Finally, inquire about the capital markets the organization uses for short-term and long-term financing. Then post by Day 5 your responses to the following:

• A summary of your interview that includes who you interviewed, a brief description of his or her role and responsibilities within the organization, and how the interview was conducted (by phone, face-to-face, a series of e-mails, etc.).
• An explanation of how the firm determines the cost of capital specifically, why it uses the methods  it does, how it is used to qualify investments or capital projects, and the capital markets the organization uses for short-term and long-term financing.
• Based on your readings this week, your interviews, and your experience, an explanation of the strengths and weaknesses of the organization's current method to calculating its cost of capital. Then, suggest some specific avenues the organization can take for potential improvement.

In your post, use caution concerning confidential information. Be careful not to reveal any information that could harm the firm or any individuals associated with the firm, including you. Use pseudonyms for the firm and individuals to protect identities, and err on the side of caution in revealing any details.