The Corporate Finance Challenges Faced by Companies - Essay Example

The consideration of the debt-to-cash ratio is important, because it enables such high-risk industry companies to plan on how to ensure their R&D projects, depending on the nature of risks that are posed by the research. Balancing the cash that a company should hold in liquid with the debt owed by the company also presents some disadvantages to high-risk companies, because there is always opportunity cost (Eilenberger, 2010). For example, a company deciding to insure its R&D for its highly risky projects requires maintaining a lot of liquid cash to pay for the insurance premiums, while that cash could have been invested elsewhere by the company and generated some financial returns.

The other notable challenge faced by companies in their determination of the cost of capital and how to apply the capital is related to the prioritization of projects. Companies require to determine which projects are most likely going to generate high returns compared to others, and then invest in them. The major challenge associated with such prioritization is when a company predicts that a certain project is likely to generate more returns than others, only to find that in reality, the case is different. This is a high risk of opportunity costs because it means that the company will have already foregone the benefits it would have obtained from the foregone project (Eilenberger, 2010).

Additionally, companies are also increasingly faced with the challenge of balancing between investing in projects that have a high potential for generating returns for the company, versus projects that may not generate as much returns, but that are capable of benefiting a large number of people in the society. All these financial and capital determination challenges mean that companies are always at risk of foregoing certain project investments that might be more beneficial than the projects they end up prioritizing and funding (Eilenberger, 2010). More challenging, however, is the fact that the existing textbook financial metrics do not provide ways for companies to account for all these challenges. This in turn means that the companies, most especially those operating in high-risk industries, have to develop their own finical and capital structure analysis metrics.