cost of capital


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Related to cost of capital: Cost of equity, Capital structure, Cost of debt

Cost of capital

Cost of Capital

The difference in return between an investment one makes and another that one chose not to make. This may occur in securities trading or in other decisions. For example, if a person has $10,000 to invest and must choose between Stock A and Stock B, the cost of capital is the difference in their returns. If that person invests $10,000 in Stock A and receives a 5% return, while Stock B makes a 7% return, the cost of capital is 2%. One way of conceptualizing the cost of capital is as the amount of money one could have made by making a different investment decision. Many companies calculate the cost of capital when deciding whether to issue stock or a bond, to determine which would be cheaper.

cost of capital

The overall percentage cost of the funds used to finance a firm's assets. Cost of capital is a composite cost of the individual sources of funds including common stock, debt, preferred stock, and retained earnings. The overall cost of capital depends on the cost of each source and the proportion that source represents of all capital used by the firm. The goal of an individual or business is to limit investment to assets that provide a return that is higher than the cost of the capital that was used to finance those assets.

cost of capital

the cost to a firm of the LONG-TERM CAPITAL used to finance its business activities. The average cost of capital to a firm which uses several sources of long-term funds (for example LOANS, SHARE CAPITAL (EQUITY)) to finance its investments will depend upon the individual cost of each separate source of capital (for example INTEREST on loans), weighted in accordance with the proportions of each source used. See CAPITAL GEARING.

cost of capital

the payments made by a firm for the use of long-term capital employed in its business. The average cost of capital to a firm that uses several sources of long-term funds (e.g. LOANS, SHARE CAPITAL (equity)) to finance its investments will depend upon the individual cost of each separate source of capital (for example, INTEREST on loans) weighted in accordance with the proportions of each source used. See CAPITAL GEARING, DISCOUNT RATE.
References in periodicals archive ?
This paper describes and compares two processes for assessing and assigning cost of capital in the public sector: that for Departments under the Capital Charge process and that recommended for SOEs.
In addition, the acquirer will earn a lower return on the cash or stock it pays for the business, which will discourage most companies with a cost of capital of around 8% to 10%.
In every case, the weighted cost of capital can be determined by taking the portion of debt times the cost of debt and the portion of equity times the cost of equity.
The cost of capital set will ensure that licensed operators who have been found to have significant market power or dominance will be appropriately compensated for the capital costs that they face when making such investments," Dr Al Amer said.
Without debt the firm's cost of capital is 14% (cost of capital and cost of equity are the same) and with 30% debt, St.
In some circumstances investment can be induced at rates below the conventional cost of capital.
INCORPORATING THE COST OF CAPITAL INTO A PRODUCT'S COST
The use of an incorrect cost of capital in capital budgeting, pricing, and other applications can have serious consequences, with the firm losing market share to competitors if the cost of capital is overestimated and losing market value if the cost of capital is underestimated.
In summary, a higher cost of debt and a greater percentage of equity financing will likely more than offset a net decrease in the cost of equity and thus result in a higher weighted average cost of capital for corporate America.
Table 33 shows the calculated cost of capital for different kinds of firms and forms of financing.
Since NPV > 0, MGR> 0 and MIRR> cost of capital are all equivalent conditions, each measure is equally capable of supporting accept/reject decisions.