How does a firm lower their cost of capital?
Answer:
Oh man, this can cover a lot of ground than what we have here. Anyway, in very simple terms, it depends on by and large the ability of the firms to produce profit.
A firm gets its money from reinvesting its earnings, by selling stocks and by borrowing (Bank loans or bonds etc). You get good rates and good terms, say prime rate, for being a preferred borrower if your company is healthy. Otherwise, the bank will charge you more because you may be riskier.
You can borrow from investors directly by selling corporate bonds at a lower interest rate and have a higher rating on your bonds if your company is a profitable one. Otherwise, you will be selling junk bonds at premium interest rates.
Furthermore, you can go equity financing but selling stocks. Microsoft sells its stocks at a premium. Enron, obviously is not doing too well if they try to sell stocks now.
by getting better terms by having a better repayment history or a more profitable outlook.
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