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Managing Finance

ManagingFinance

ManagingFinance

Thecostof capitalcan be definedas theweighted averagenettaxof a companys’preferredstock,long-term debtandequityrelatedto commonstock.Its usuallytheopportunitycostof all thecapitalresourcesinvestedin thebusiness.Fora companythat doeswellthecostof bondsandlong-term loansusuallybecometheleastexpensivecomponentsof thecapitalcost.Thiseffectcan be accountedfor bythefactthattheinterestalwayswill be deducted incometaxes,therefore,leastexpensive.Thispaperis goingto discussthevarioussourcesof capitalavailableto Genesis cpmpany,evaluatingtheir costsandrisksandlateron makingrecommendationof thebestsource.

CostsandRisks of externalfinancing

Businesseshavevariedwaysof raisingfunds.Itcan eitherraisemoneyof funding from within oroutsidesources.Thereisneed,therefore,to assessthesesourcescarefullyas there can be costsandriskassociatedwith them. Internalsourcesusuallycan be lessriskysince thefunding doesnot getaffectedby externalfactorsthat can be drasticsometimes.Therisksof externalfinancingamong them can be interestof currencyatefluctuations.Thegovernment,alsoa keyborrowingsourceandcan rollover sometimesresultingin highercostsforthegivenborrowing.Ifa giveninvestmentcan be equallyriskyas a companys`averagebusinessactivities,thentheuseof thatcompanys`averagecostof capitalcan be bestforinvestmentevaluation. Agoodinvestmentshould havea higherexpectedreturnorgain oncapitalthan thecostof usingthatcapital(Pratt, 2002).

Importanceof rapidgrowthplansin a smallbusiness.

Abusinessshould focusaheadof thestartup phase.Itshould be ableto identifyopportunitiesforgrowingandmakethisa priorityensuringcontinualsustainability. Growthcan be measuredusingturnover, marketshare,profitsamong others.Nevertheless,determiningwhich measureormethodgivesthemostaccurateimageof thebusinessdepends largelyon thenatureof business.Growthcan be the bottom line of all investments since no one wills to riskand make losses, therefore, thereforegrowthensures that shareholders` funds get maximized and opportunities getseized.(Hawawini &amp Viallet, 2011).

Isthere a moreefficientwayof growinga businessjustifyyour answer

Themosteffectiveand efficient&nbspwayof growinga businesscan be ensuringthatthecostof capitalinjectedin itcan be lowerthan thereturn.Growthcan be theultimatepurposeof everymanagementand,therefore,should be evaluatedcarefullyto ensurethecostof capitalcan be as lowas possible.Internalsourceshavebeenseento be someof thesafestandefficientwaysof growingbusinesses.Thiscan be attributedtopthefactthatthere are nofurthercostsincurredin sourcing forthem (Pratt, 2002).

Conclusion Costof capitalassessmentis keyto businessgrowthsince itdetermineshowmuchgoesout as a resultof thecapitalthat wassourced. Genesis company,thereforecandecideto exhaustinternalsourcesfirstbefore goingforexternalsources.

References

Hawawini,G. A., &amp Viallet, C. (2011). Financefor executives: Managing for value creation.Mason, Ohio: South-Western Cengage Learning.

Pratt,S. P. (2002). Costof capital: Workbook.New York: Wiley.