what is cost of capital?

Question

this a term used in management accounting and in the finance industry at large

Answer 1

The cost of capital for a corporation is the expected rate of return that investors expect to get. The cost of capital can be used for discounting cash flows to the firm to get the value of the firm.

For a company with simple capital structure (just debt and equity), the cost of capital will be a weighted average of the expected return on equity and the after tax expected return on debt.

Let's look at an example. Suppose that the expected return on equity is 12%, that debt is at 9%, that the tax rate is 35% and that 30% of the firm's value is in debt (and 70% in equity). Then the cost of capital is:

0.70*12% + 0.30*9%*(1-0.35)

The expected return on debt can be found by looking at the yield of the most recent debt. The expected return on equity can be estimated using the firm's beta, and the Capital Asset Pricing Model (CAPM).

Answer 2

It is what the money you have invested in your business costs you. Capital in this instance is made up of two types: shareholder funds and loans. Shareholder capital is generally the more expensive of the two, because the dividends paid to shareholders are generally not tax deductable, whereas the interest paid on loans is.

It is an important part of the financial management to get the mix between the two types of capital right.

Answer 3

cost of capital is the interest payment made to banks etc.

Capital cost is the amount of cash paid for something

Answer 4

This is the rate of return that a firm would receive if it invested its money someplace else with similar risk.

Answer 5

well the best capital will cost loads, about £13!!!

Answer 6

your hard earned money...