Also, the importance of the capital asset pricing model for firms which want to evaluate their cost of capital, is explored in the next part. The link between CAPM, the required return on equity and the weighted average cost of capital is explored, with the help of various resources.
There are many ways for the companies to raise the capital, the most common way is from stock markets, in this way the investor will be part from this company and the benefits will be based on the company performance and the company success is important for the shareholder. Another option is from bonds markets, in this way the bond owner does not have the ownership in the company and the benefit not very important for the bondholders, also the bondholder does not care about company success (Young, A 2009). For example if a firm undertake debt to finance the business, it will help the owner to retain the ownership but it will result in regular payment of interest and the lenders are less interested in success of the company, so if the owner relay more on debt fund, it will enhance financial risk. ...Show more