Do You Know Your Cost of Capital?
ACT 510
November 19, 2013
Do You Know Your Cost of Capital? Investing capital dollars drives the corporate strategy to newer heights in this age, where the business is dependent upon making sound decisions that financially intertwine for further growth and development. Within any financial team, analyses should be conducted uniformly across the board, arriving at a conducive return on investments to solidify the reasoning behind completing the future project. As Jacobs & Shivdasani point out, this isn’t always the case, with survey data from the Association for Financial Professionals (AFP) solidifying the claim. Generally speaking, the consensus shows conflicting opinions on calculating the cost of capital expenditures, with the population unsure of their trust costs altogether. Further AFP surveys conclude that most budgets are off by 1% or more, costing corporations millions of dollars in future revenue, while respondents couldn’t agree on using an identical formula to calculate the cost of debt as well. Likewise, budget assumptions play into this financial game, and senior level leaders need to understand the specific cost of capital factors thrown into the mix. As more surveys are exposed, the writers devote a majority of time to thorough explanation, rather a step-by-step analysis, of how to correctly determine this cost. With this lens of clarity, the revelation of efficiency is examined, where these decisions not only affect the business, but trickle down into economic stimulus or decline. Balance sheet cash flows sit at record highs, with future heavy investments at a halt. To see the whole picture, management must conduct an analysis of their own, to determine the full equity in all corporate investments (Jacobs & Shivdasani, 2012). As a business manager leading a project management team, this leader should have individual insight as to how each investment will contribute to the company balance sheet, especially when projects are
November 19, 2013
Do You Know Your Cost of Capital? Investing capital dollars drives the corporate strategy to newer heights in this age, where the business is dependent upon making sound decisions that financially intertwine for further growth and development. Within any financial team, analyses should be conducted uniformly across the board, arriving at a conducive return on investments to solidify the reasoning behind completing the future project. As Jacobs & Shivdasani point out, this isn’t always the case, with survey data from the Association for Financial Professionals (AFP) solidifying the claim. Generally speaking, the consensus shows conflicting opinions on calculating the cost of capital expenditures, with the population unsure of their trust costs altogether. Further AFP surveys conclude that most budgets are off by 1% or more, costing corporations millions of dollars in future revenue, while respondents couldn’t agree on using an identical formula to calculate the cost of debt as well. Likewise, budget assumptions play into this financial game, and senior level leaders need to understand the specific cost of capital factors thrown into the mix. As more surveys are exposed, the writers devote a majority of time to thorough explanation, rather a step-by-step analysis, of how to correctly determine this cost. With this lens of clarity, the revelation of efficiency is examined, where these decisions not only affect the business, but trickle down into economic stimulus or decline. Balance sheet cash flows sit at record highs, with future heavy investments at a halt. To see the whole picture, management must conduct an analysis of their own, to determine the full equity in all corporate investments (Jacobs & Shivdasani, 2012). As a business manager leading a project management team, this leader should have individual insight as to how each investment will contribute to the company balance sheet, especially when projects are
References: Jacobs, M. T., & Shivdasani, A. (2012). Do You Know Your Cost Of Capital?. Harvard Business Review, 90(7/8), 118-124.