The cost of capital is the minimum acceptable level used to determine whether or not to invest in a project. When evaluating the costs of equity, common methods of measurement are CAPM, the arbitrage pricing model, and the multifactor model. Market risk affects the cost of raising equity. Changes in interest rates, inflation rates, and the economy contribute to market risk. Companies finance debt in a variety of ways.
Firms can issue stock, corporate bonds, commercial paper, or borrow money to finance projects.
The weights of debt and equity components are assigned using market value. Preferred stock is issued to raise capital. While preferred stock is less risky than common equity, it is riskier than debt. The value of the stock is dependent on the number of shares outstanding by the market value per share. Most stock is traded on organized exchanges.