Reference no: EM133004187

Question - Harriet's suggestion to finance the project using the cost of debt from retained earnings (50%) and bonds (50%) I think is a good suggestion but can be risky. The cost of debt is the effective interest rate an organization pays on its debt such as bonds and loans and is the before tax cost of debt (Hayes, 2021). The cost of debt can help measure and give a better understanding to investors the organization risk level which is compared to other riskier organization who have a higher cost of debt (Hayes, 2021). It could possibly lower financial cost and allow the organization to make periodic payments. The organization may keep some of the profits because they will be required to pay what they owe. The yield of maturity on outstanding debt is a better measure of cost of debt than the coupon rate (Brigham & Houston, 2019). Most organizations used short-term and long-term debt to finance most projects.

Weighted average cost of capital (WACC) which is the weighted average of components costs of debt, preferred stock, and common equity (Brigham & Houston, 2019). The cost of capital is used to access an investor return on investments. Cost of equity determines the rate of return on a project and if the project meets capital return requirements. I believe the project should use the weighted average cost of capital (WACC) it is a good appraisal to proceed or not to proceed with a new project and helps with comparing in other organizations.

It is important to have the correct calculations and account for all possible low and high risks of the project. Compare those calculations with other similar projects for better understanding of risk associated and to help with decision-making and opportunities for the organization and target with the strategic business plan.

References - Brigham, E. F., & Houston, J. F. (2019). Fundamentals of financial management (15th ed.). Boston, MA: Cengage Learning.

Hayes, A. (2021). Cost of Debt. Investopedia.

Question - If you do not consider the risk of projects, what type of projects are more likely to be accepted and as a result, what will happen to the overall risk profile of the company?