Using Financial Management Functions in Decision-Making Process

The relationship between these financial management functions of Cost of capital , bond ratings, and the capital budgeting decision-making process revolve basically on the sound management of the company capital.

Cost of capital is concerned with securing the capital for operation expenditures of the company. Capital budgeting is the allocation of these cost of capital to viable investments that could enable the company to attain the highest possible gain for the capital invested. And bond ratings reflect the result of the financial management of the company involving the cost of capital and capital budgeting decision-making process.

The effect of the capital budgeting decision-making process will result in the generation of more capital needed for company operations in the form of retained earnings. This, in turn, will result in positive bond ratings. Which will consequently lead to the pouring in of additional capital investments from new investors because a positive rating such as AAA will give investors confidence in the company's operations and ability to pay debts such as bonds.

Also, it will be difficult for companies to make proper planning during the capital budgeting process if the cost of capital is low or incapable of meeting its required financial budget such as acquiring a new business. Capital budgeting relies on the money available for disposal. How much the company can borrow from lenders or re-invest from retained earnings will help in its final decision on investments. Lenders will probably not lend money to companies who showed negative bond ratings.

Proper planning during capital budgeting will also make sure that the cost of capital are being used in the best possible way producing the maximum benefits to the company. Cost of capital therefore will not be successful on its own or will not generate positive bond ratings if the money is not be invested properly, which is the primary role of capital budgeting.

Positive bond ratings will not be attained if capital budgeting is weak and cost of capital is low. This means that investors are not confident of the company's ability to generate profit and in the way it allocate its assets. All of these functions are therefore interrelated. The proper management of one will affect the functioning or the status of the other.