Read through the below post and provide any on of the following: APA format 300 Words.

 Read through the below post and provide any on of the following: APA format 300 Words.
.Ask a probing question, substantiated with additional background information, evidence or research.  
· Share an insight from having read your colleagues’ postings, synthesizing the information to provide new perspectives.  
· Offer and support an alternative perspective using readings from the classroom or from your own research.  
· Validate an idea with your own experience and additional research. 
· Make a suggestion based on additional evidence drawn from readings or after synthesizing multiple postings.
Post: 
Harriet’s suggestion to use cost of debt from retained earnings and bonds to expand the company to bring more expensive fabrication machines might be good idea and commonly used technique in expansions and acquisitions. This method also makes the 10% projected return look great. Using cost of debt to expand the companies is always good thing and we only pay for what we own unlike equity investments who offer investments for expansions in return of ownership in the company. But if we calculate the weighted average cost of capital with the data provided, we’ll get a clear idea on how this project might impact the returns (Fred Decker).
Debt:
Cost = 7%
Weight = 50%
WACC = 7*50 = 3.5%
Retained Earnings:
Cost = 15%
Weight = 50%
WACC = 15*50 = 7.5%
WACC
WACC after expansion = Debt + retained Earnings = 3.5 + 7.5 = 11%
This is greater than the estimated return 10%. So, it’s a bad idea to use cost of debt.
Cost of capital is source of financing business activities through debt or equity capital. It is also referred to as company’s required return. Cost of capital can be financed through bonds or loans or using equity. Bonds or loans doesn’t need the company to offer their part of ownership to any one, they only pay interest to the amount they owned. Equities are little different when compared to loans and bonds. They need a part of ownership to offer funds to expand the company and doesn’t require any interest in return. There can be also much potential of expansion in this process. The Capital asset pricing model is the technique used to calculate the cost of equity. Weighted average of capital sources is the average of cost of capital from debts from loans and equity. If we take all these into consideration, it is always a safe bet to have their own cost of capital rates for budgeting purposes (Jared Hecht 2016).
As the WACC is more than the calculated return of 10%, there is a high risk involved in this project. Increasing production of expensive fabrication can lead to increased inventory that needs to be cleared with the sales slowing down. The strategy to increase the sales need to be changed for the project to grow substantially and needs to be considered various factors before starting expansion on new project.
Identifying the type of risks that can be associated with competing projects is the one the that helps to incorporate the risk. Risks associated with project can vary based on the scope of the project, purpose and scale of the project. Calculating the magnitude of the project and degree of impact and playing safe can be better option while analyzing competing projects. Having a specified standard and common terms to analyze each project (Martin Pergler and Anders Rasmussen (2014, May)).
References:
Jared Hecht, Debt vs. Equity Financing: Which Way Should Your Business Go on July 19th, 2016 from https://www.entrepreneur.com/article/278430
Fred Decker.  Pros & Cons of Financing Expansion Through Retained Earnings. Retrieved from https://smallbusiness.chron.com/pros-cons-financing-expansion-through-retained-earnings-40390.html
Martin Pergler and Anders Rasmussen (2014, May). Making Better Decisions about the Risks of Capital Projects. Retrieved from https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/making-better-decisions-about-the-risks-of-capital-projects