THE COST OF CAPITAL, CORPORATION FINANCE AND THE OF INVESTMIENT
In the business world we make investment for two main reasons or either of them that can be for the maximization of our profite from a business or it can be for the maximaization of the market value of the assets.
Businesses generally aquire the assets if the perceives that the particular asset can help in increasing the profit of the organisation. According to the theory the acquisition of the asset can help to increase the profit only if the returns arising due to that asset are more than the interest costs arising due to that asset.
On the individual level when we are cosidering the purchase of any asset we should also consider the risk factor associated with that asset. Profit maximization and value maximization they both have more or less same meanings and implications. But if the case is of uncertainity then the profit maximization has no meanings, it remains meaningless for the investors.
When the situation is uncertain then in that case the market value maximization becomes the basis for the theory of investment, if this notion is kept in mind then every time when we are going to make a decision to invest or not we should simply keep one thing in our mind that can be the basis of the decision, that is if we aquire the particular asset will it help to increase the value of the firm’s share? If in response of this question we comes on this point that yes it will result in increase in the value of the firm’s share then definitely go for that asset, otherwise reject it.
The theory of modigliani and Miller explains us the effect of the capital structure on the value of firm’s