Whenever we think of starting a new business, we will need a fund.

When we start with a

capital but sometimes the capital amount that we generated will not be enough for us as well as
sometimes we need more fund for our growing business. In this case we have companies need
investors, shareholders, bank, loan. And to any kind of company there is a investor because they
should have capital to resume normal business[ CITATION Ros134 \l 1033 ].
Cost of capital can be described as the required return necessary to make a capital
budgeting projects like building new garment factory. The cost of the company will represent the
hurdle rate that a company must overcome before generating value[ CITATION Ken198 \l 1033 ].
The pitfalls of overall cost of capital which will measure mitigate them.
- Regarding the cost of capital , the numerical value doesn’t matter very much and is not
useful to incase of not having the knowledge about the capital. We should always keep in
mind and track on it about capital should always be more than the loans. The market is
never same because of competition, demands and various price range. So, the profit
margin should always be in a range where we will gain more profit for the company and
get more return and finally balance our loan.
- Another aspect about the cost of capital is on the equity side. After identifying the risk of
the specific projects compared to the other projects where we can invest. The opportunity
cost will change over the time, which can make us change in the fund in the time. So, to
overcome the opportunity cost company can do proper cost benefit analysis for different
kinds of projects they have.
- We should also be prepared like sometimes the project t we are doing will have
unexpected difficulties. In this situation we need more fund by external source because
we have not funded much in capital budgeting. When amount increases the risk is also
increased for investor. Thus, more and more capital requirement in specific projects may
increase the overall cost of the capital. so, the company needs to estimate their budget
less over the forecasted budget for companies.
So, there will be different pitfalls which are interrelated with the cost of capital. If will get proper
finance analysis that problem could be fixed.

References
Kenton, W. (2019, june 5). cost of capital defination. Retrieved from Investopedia:
https://www.investopedia.com/terms/c/costofcapital.asp

Ross, S. A., Westerfield, R. W., & Jordan, ,. B. (2013). fundamentals of corporate finance . New
York: McGraw-Hill Companies, Inc.