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It is 2 question 1 - Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets.
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Firms raise capital at the total corporate level by retaining earnings and by obtaining funds in the capital markets. They then provide funds to their different divisions for investment in capital projects. The divisions may vary in risk, and the projects within the divisions may also vary in risk. Therefore, one should use different riskadjusted costs of capital for different capital budgeting projects.
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For capital budgeting and cost of capital purposes, the firm should always consider reinvested earnings as the first source of capital ie use these funds first because reinvested earnings have no cost to the firm.
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