Assignment 2: Required Assignment 2—Genesis Energy Capital Plan Report

Managing Finance

Student’s Name

University Affiliation

Cost of capital is defined as the cost of the fund that a business has from the different sources that is the debt and the equity financing. The cost of capital is calculated as the weighted average cost of capital because most businesses find it very hard to rely on one source of financing (Armitage, 2005). The formula is total equity as a percentage of the total capital times the cost of equity plus total debt as a percentage of the total capital times the cost of debt. For example, if equity is 30% of capital and cost of equity is 10%, while debt is 70% of capital and the cost of debt is 20%. Cost of capital is calculated as:

(30*10)+ (70*20)/100= 17%

This means that the cost of capital is 17% of the total capital invested.

Different businesses have different needs, and this is still the case when it comes to business financing. It is crucial for a company to understand the costs and risks associated with external financing to ensure that the best option among the available ones is taken by the business need.

Most small business owners desire to move at a very orderly growth rate, but different factors in the business world can cause very rapid growth which can affect business operations and turn a company bankrupt (Viguerie, Smit & Baghai, 2008). It is important to have a rapid growth plan to ensure that in such cases, which are sometimes not foreseen, a business can manage itself effectively. Other than the two options that are debt and equity financing there is no other way of funding an organization striking a balance between these two has proven to be very effective over all the years.

References

Armitage, S. (2005). The cost of capital: intermediate theory. New York: Cambridge University Press.

Viguerie, P., Smit, S. & Baghai, M. (2008). The granularity of growth: how to identify the sources of growth and drive enduring company performance. Hoboken, N.J: John Wiley & Sons.