If cost of capital is poorly managed, this can lead to a company overpaying for acquisitions, incorrect statement of asset values on balance sheets and the inability to assess which balance sheets can be stretched to maximise the impact of financial leverage. Cost of capital was considered the domain of the finance department and CFO, but treasurers have an important role in its analysis. Judging capital markets behaviour, how debt is priced and what equity returns shareholders can expect are just a few of the main roles that treasurers can play. Cost of capital theory and analysis can be used to assess optimal capital structure. Calculating optimal capital structure requires estimating the cost of debt and cost of equity capital at different levels of gearing.
