Financial managers determining the best way for a company to finance its operations is a difficult task that requires careful consideration of many factors. It involves finding the right mix of borrowing and investments that minimize the company's costs while maximizing shareholder value and maintaining financial flexibility. The first step is to figure out how much it will cost the company to borrow money. This involves looking at things like interest rates, credit ratings, and current market conditions. The company's current debt and any new debt that it may want to take on will be analyzed to find out what the cost of borrowing will be. Once the cost of borrowing is determined, the next step is to figure out the cost of investments. This involves looking at things like the company's risk profile, beta, and expected returns.

The Weighted Average Cost of Capital (WACC) is then calculated using a formula that takes into account the proportion of borrowing and investments in the company's financial structure. This formula determines the average cost of financing for the company. After calculating WACC, financial managers must evaluate the trade-offs between borrowing and investments. Borrowing usually offers tax advantages due to interest deductibility but also increases financial risk due to interest obligations. Investments, on the other hand, avoid debt-related risks but may dilute ownership and control. When deciding on the best way to finance the company, it is important to consider the company's growth plans and capital expenditure requirements. A company with big growth plans may need more investments to fund expansion, while a mature company with stable cash flows may prefer borrowing to take advantage of tax benefits. It is important to assess how the chosen financial structure will affect the company's operating results, including profitability, liquidity, and financial stability. Changes in interest rates, market sentiment, or business conditions may require changes to the financial structure.

References:

Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice [withMindTap] (16th ed.). Mason, OH: South-Western.

Ross, S.A., Westerfield, R. W., & Jordan, B.D. (2018). Fundamentals of corporate finance (12th ed.). McGraw-Hill Education.

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