Estimation of Weighted Average Cost of Capital Essay

Estimation of Weighted Average Cost of Capital - Essay Example The paper also discusses the various project evaluation techniques like Net Present Value Method, Internal Rate of Return, and so on. The paper takes a quantitative approach for the explanation of various concepts in Capital Structure and Project Evaluation Techniques/Capital Budgeting Techniques. Cost of capital is an important phenomenon in determining the overall/weighted average cost of capital. In fact, the financial risk is judged by investors and other stakeholders in line with cost of capital and nature of capital structure. The overall cost of capital can be reduced and value of the firm can be improved by maximizing the debt content in the capital structure. But, as debt content goes on increasing, equity investors expectations about risk will also change. Investors feel risk in investment with highly levered firms and vice versa. Capital structure theories postulate the various possibilities of capital structure. It does not speak about which approach is most beneficial to companies in various situations. Capital structure is not a static phenomenon. It keeps on changing with every change in the mix of various sources of capital/fund. The profitability of a business proposal/ project can be evaluated in various ways using both discounted and non-discounted project evaluation methods.