DESCRIBE the difference between opportunity cost of capital and weighted average cost of capital.?

Question

DESCRIBE the difference between opportunity cost of capital and weighted average cost of capital. WHAT are the primary assumptions you make when you use the weighted average cost of capital based on actual values from a corporate balance sheet?

Answer 1

Opportunity cost = return you COULD have got if you had invested the money in an 'equivalent risk' venture elsewhere.

Cost of capital is the 'actual' cost of borrowing/using the money.

Main assumptions made when doing WACC calculations are that the figures given are a 'true' statement of the current situation (often figures are 'historical' and do not reflect the current situation).

Answer 2

The weighted average cost of capital is, essentially, what a company is expected to pay to get capital (assets). It's the minimum return that creditors and owners will take in order to lend to or purchase part of the company. It's just a little more specific than cost of capital, but there's no real difference. Cost of capital is merely what an investor expects to earn on their investment, which is the cost of capital to the company that he's investing in. Hope that makes sense. :0)