To determine the Cost of Capital in the future,

there are several factors that

influence

The Company The Company

Can Control Can’t Control
Capital Structure Stock and Bond
Policy Markets
Dividend Policy Market Risk Premium
(RPM)
Investment Policy Tax Rates
A. The Company Can Control :
1. Capital Structure Policy
• To determine the Capital Structure
Policy a company must consider the
company's Business Risk (without
debt) and Financial Risk (with debt).
2. Dividend Policy
• Dividend policy is the decision of the
board of directors regarding the amount
of the remaining profits (past or present)
that can be distributed to shareholders in
a company
• Deviden Poliy Optimal  when the policy
can create a balance between current
dividends and future growth in order to
maximize the company's stock price
3. Investment Policy
• Investment policy whereby when the company
has new capital and will be invested in assets of
business :
 If the company invests in a completely new line
of business  the marginal cost of capital must
reflect the risk of the new business.
 If the line of business is the same as the core
business  the risk can be to assume the
marginal cost of capital with existing assets.
B. The Company Can’t Control :
1. Stock and Bond Markets
• Interest rates are strongly influenced by
inflation. Inflation rises will cause interest
rates to rise.
• if interest rates in the economy rise, the
costs of both debt and equity will
increase.
2. Market Risk Premium (RPM)
• The RPM is the difference between the
expected return on a market portfolio and
the risk-free rate.
• Investors’ aversion to risk determines the
market risk premium. Individual firms have
no control over the RPM, which affects the
cost of equity and thus the WACC.