FINANCIAL MANAGEMENT Arguments for or against project specific cost of capital

Running head: FINANCIAL MANAGEMENT
Financial Management
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Table of Contents
Arguments for or against project specific cost of capital:..........................................................2
Suggestion for ascertaining the project specific cost of capital:................................................2
Suggestion for Risks Adjustment:..............................................................................................2
Risks of not using discount factor:.............................................................................................2
References:.................................................................................................................................3

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Arguments for or against project specific cost of capital:
Cost of capital is regarded as the vital factor in ascertaining the capital structure in an
organization. Arguably the cost of capital is the useful financial tool for the investors and
companies that is well accepted among the financial analyst (Burns & Walker, 2015). Cost of
capital for a project is important for investors in arriving at the valuation of companies.
However, ascertaining project specific cost of capital is tricky because both the debt and
equity financing carries respective advantage and disadvantage.
Suggestion for ascertaining the project specific cost of capital:
The cost of capital for the project can be determined through economic value added
by subtracting the cost of capital from the profit made by the company. Another way is NPV
that is largely used method of assessing the projects to ascertain the profitability of the
investment.
Suggestion for Risks Adjustment:
The cost of capital for this project can be figured as the minimum amount of return
that is needed to induce the investors in the certain project. With few adjustments to the
capital budgeting, an investor can draw comparison of projects under the different risks
situation (Lalvani, 2016). The risk can be adjusted by increasing the required rate of return in
comparison to discounted factor of project cash flow.
Risks of not using discount factor:
The risks associated for not using the discounted factor would lead to rise in the rate
of return discount fact for this project cash flow. As a result, the value of the future cash flow
of project may reflect a higher value with greater uncertainty of the project.

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References:
Burns, R., & Walker, J. (2015). Capital budgeting surveys: the future is now.
Lalvani, A. (2016). An Analysis of International Hedge Fund Risk and Return.