Determining the Cost of Capital

ExxonMobil

Even though investment prospects vary radically across businesses and industries, one would anticipate the manner of assessing financial returns on investments to be properly even. In this case, Exxon Mobil has its investments not only in the natural gas resources sector but also in chemicals and downstream business operations. Cost of capital also referred to as weighted average cost is basically the required rate of return that ought to be generated on an extra or additional investment for the market value of the company to actually remain the same. So what approach should Exxon Mobil take in determining its own cost of capital for generating new capital investment decisions (Jacobs and Shivsdasani, 2012)?

Firstly, it is imperative for Exxon Mobil to ascertain the difference that is there between the cost of the department and the cost of the firm itself. This is for the reason that the cost of the department or division might be dissimilar from the cost of the company. Therefore, the approach that the company should take is by use of the weighted average cost of capital approach (WACC) (Jacobs and Shivsdasani, 2012).

This approach is considered the ideal one for Exxon Mobil for the reason that by using the weighted average cost of capital, the company will be able to include or encompass the costs from all capital investments, both the additional ones and the existing ones. In addition, by making use of this approach, the company will be able to take into consideration every cost of capital that is rated from each and every capital investment that it has. In addition, by making use of this approach, the company will be able to make an adjustment for the differences in risk. In turn, this will make it easy for the company not to accept investments which are too risky or turn down the capital investments which are in actual fact safe (Jacobs and Shivsdasani, 2012).

In addition, WACC is an important factor for the stakeholders of Exxon Mobil. This is for the reason that, by making use of this approach, it is possible to determine and ascertain the returns that ought to be expected from the capital investments in the long run. What is more, the company can be able to ascertain what is to be paid for the debt in obligation and also determine the amount of money that is required in return for the company to break even on its capital investments (Pratt and Grabowski, 2010).

The calculation of the weighted average cost of capital determines the cost of capital of the firm in which each and every classification or type of capital is weighted in an equal manner (Pratt and Grabowski, 2010). All of the sources of capital of Exxon Mobil such as XTO Energy which was acquired for development of shale and unconventional natural gas resources within the continental United States will be included and taken into consideration. The company will be able to ascertain any increase or decrease of its valuation.