Capital Structure and the Cost of Capital

Workshop Four – 4.4 Capital Structure and the Cost of Capital

Discussion Introduction and Alignment

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Because debt and equity have different characteristics, managers must choose the blend that creates the optimal risk and return structure for the organization.  Suppliers of debt and equity capital establish required rates of return on that capital, so it is not costless to the business.  Managers must understand issues related to capital costs and be able to estimate the overall cost of financing to their businesses.

Upon completion of this assignment, you should be able to:

  1. Estimate the component costs as well as the corporate cost of capital.
    1. Discuss the factors that influence the choice between debt and equity financing.
    2. Discuss how the cost of capital is used in capital investment decisions.

Resources

  • Textbook: Healthcare Finance: An Introduction to Accounting and Financial Management

Instructions

  1. Read Chapter 13 of Healthcare Finance: An Introduction to Accounting and Financial Management.
  2. Navigate to the threaded discussion below and respond to the following:
    1. Is the corporate cost of capital the same for all firms?  Explain your answer.
    2. For any given firm, can the corporate cost of capital be used as the hurdle rate for all projects under consideration?  Explain your answer.
  3. Your initial response should be 150 to 300 words in length and include at least one academic source that is properly cited.
  4. Your initial post is due by the end of the fourth day of the workshop.
  5. Now conduct a critical analysis of postings by at least two of your classmates, as well as all follow-up instructor questions directed to you, by the end of the workshop.
    1. Each critical analysis of your classmate’s posting should be written to include the following topics:
      1. Identification of important information (facts, experiences, data etc.)
      2. Identify the main conclusions drawn
      3. Analyze the key concepts in order to understand your classmate’s line of reasoning
      4. The underlying main assumption(s), of your classmate’s thinking.
    2. The focus for your critical analysis is not whether or not you agree with your classmates, but how well was their position presented.
  6. Each response should be at least 100 words in length and properly cite one credible source.

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