CFO IBM. You Successful Years, Concerned Sources

¶ … CFO IBM. You successful years, concerned sources funds, cost funds. With changing business conditions, costs . At IBM, issued $100,000,000 Corporate Bonds carry a 6% interest rate, $200,000,000 Equity offers a 10% dividend, $100,000,000 Retained Earnings opportunity cost 9%.

The cost of capital at IBM

IBM is one of the oldest and most prosperous companies within the technological community. The organization has led the industry through innovation, which has in turn been supported by a strong internal strategy. One crucial pillar of the organization's success has been represented by its wide access to financial resources, through which IBM was able to develop and integrate new technologies that advanced their products.

Still, in the modern day business climate, the access to funds becomes more restricted, as borrowing becomes more expensive. While the organization is in dire needs of funds, a question is being posed relative to the sources of the future funds. Specifically, emphasis is being placed on the means to be used by the company in order to still have access to financial resources, but to do so in a cost efficient manner.

A first issue to consider in this setting is represented by the computation of the weighted average cost of capital. The weighted average cost of capital represents a computation method by which the economic agents assess the cost of their capitals in a proportionate manner. In other words, the formula for the weighted cost of capital includes all categories of costs and the proportions they hold in the overall capitals. The formula is as follows:

WACC = E/V x Re + D/V x RD x (1 -- TC), where

Re is the cost of equity

Rd is the cost of debt

E is the market value of the firm's equity

D is the market value of the firm's debt

V is the sum of E. And D

E/V is the percentage of financing that is equity

D/V is the percentage of financing which is debt, and last

Tc is the corporate tax rate (Investopedia, 2012).

In the case of IBM, the weighted average cost of capital is computed as follows:

IBM WACC = 33% x 10% + 33% x 6% x (1-9%) = 0.33 x 0.1 + 0.33 x 0.06 x (1 -- 0.09) = 0.033 + 0.018 = 0.051

In order to bring down the cost of its capital, IBM should implement some tactical and some non-tactical measures. For instance, it should first pay more attention to the research process and allow more financial specialists to provide their valuable input. Then, it would also be useful to focus on the principal of the stocks issued in order to generate stability (Rapport Capital Formation Strategists Inc.). This element could however generate dissatisfactions among the investors.

At a more practical level, the cost of IBM's capital can be addressed through internal processes of budgets restructuring in order to create cost efficiencies. At a strict funding level, emphasis should be placed on the issuance of corporate bonds, as these carry the lowest interest rate.