Managerial Finance Assignment Example | Topics and Well Written Essays - 250 words

Managerial Finance - Assignment Example For example a firm is investing a sum of money in a project which promises to yield $200, $400 and $ 1000 in the next three years. Simply adding this figure would give us a wrong estimation as the money is to be received in the coming years and not today therefore we will have to discount these sums of money using a particular interest rate to know the actual worth of dollars that would be today. 2 ) Opportunity Costs are those costs that a firm foregoes in order to pursue some other investment or decision. For example a company has a plot of land that is vacant, it now has two options either to rent it and receive rent income or to use that land to construct its factories that will again earn it some benefit. Now, if the company decides to construct a manufacturing plant on that site it has to forego that rental income which otherwise it would have received if the factory was not built. Hence in finance and business we factor in that cost and include it as an expense to gauge the true outcome of our actual decision. 3) Cost of capital is the cost for a firm of raising capital either through equity or debt. A company has te decide the optimum mix of both as it will invest that money to gain higher returns therefore the lower the cost of capital the better. The cost of capital is determined by the firms target capital structure which is the weight ages in which it wants to raise equity and debt. It is the duty of the Finance Managers to manage a firms cost of capital and define an optimum kevel. 4) The firm’s optimum capital structure is the weight ages of both equity and debt for which the cost of capital is the lowest. We also know that a company cannot raise unlimited amounts of capital for that lowest cost and optimum weight age level. The WACC (Weighted Average cost if capital) changes after a particular level of capital is reached also