Discuss the controllable factors those support to optimise the cost of capital of a firm.

Cost of capital is the required rate of return that a firm must achieve to cover the cost of generating funds in the market place. It is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. Controllable Factors that support to optimize the cost of capital of a firm are: (1) Capital Structure Policy A firm has control over its capital structure, and it targets an optimal capital structure. As more debt is issued, the cost of debt increases, and as more equity is issued, the cost of equity increases. (2) Dividend Policy Given that the firm has control over its payout ratio, the breakpoint of the marginal cost of capital schedule can be changed. For example, as the payout ratio of the company increases, the breakpoint between lower cost internally generated equity and newly issued equity is lowered. (3) Investment Policy It is assumed that, when making investment decisions, the company is making investments with similar degrees of risk. If a company changes its investment policy relative to its risk, both the cost of debt and cost of equity change.