Asset financing is a critical business operation requiring effective planning. While managers make several other considerations, they are drawn into using the Weighted Average Cost of Capital (WACC), which refers to the average rate at which a business is anticipated to repay all its security holders in the process of financing its assets. For example, WACC may be the charge of repaying all the processes of constructing a new production line in a company. Corporate planners also consider the price of obtaining new assets for their company, which constitutes the cost of capital. According to Antill and Grenadier, the Optimal Capital Structure (OCS) is the best balance of financing equity and debt to produce the maximum company market value while lowering the cost of capital as much as possible. For instance, keeping the WACC is one approach to attaining an OCS.
Corporations are also aware of the need to choose the best strategy of setting their asset values. The Equilibrium Pricing Model (EPM) is among the commonly used methods. An EPM model is an asset pricing approach that assumes that asset prices will jointly meet the requirement that the amount of every supplied and demanded asset must be the same at that price. An EPM helps organizations in managing different risk types. In economics, business risk refers to the factors which a corporate organization must consider in planning because the issues are likely to lower the chances of realizing its mission and vision. For example, constantly changing population demographics that are likely to reduce a company’s ability to make profits pose a risk. Companies also face financial risk, which is the likelihood of losing money on any investment. For instance, the probability that an investment worth $3000 will yield only $2500 is a financial risk. Deductively, setting asset prices properly helps in minimizing damages to company investments.