The Genesis operations management team was excited to understand the various options for securing financing to fund the rapid growth plans. The team was surprised by the cost associated with using funds supplied by others after accounting for risk of investments in its small but profitable company. Sensible Essentials explained how the cost of external financing can be calculated.
Using the readings for the module, the Internet, and the sources you identified in Module 3, do the following:
- Explain with examples how the cost of capital is determined.
- Calculate the differences in cost and risk. Explain why the costs and risks of external financing are important for the organization to understand.
- Explain why rapid growth plans are important to a small company. Would there be a more efficient way to fund a growing company? Why or why not? Justify your answer.