What is Cost of Capital? Description
The Cost of Capital is the amount, expressed as an
annual percentage, that a firm must pay to obtain adequate funds.
Firms finance their operations by three mechanisms:

Issuing stock (equity or preferred).

Issuing debt (borrowing from a bank) .

Reinvesting prior earnings (internal financing).
The significance to a business of its cost of capital is that
it has to ensure that all investments it makes yield a
Return, which is at least equal to the cost
of capital. The return on capital must be greater than the cost of capital.
Calculation of Cost of Capital. Formula
The Cost of Capital is the weighted sum of the:

Cost of Debt

Cost of Preferred Stock

Cost of Equity
To derive the Cost of Capital, each of its 3 components must
be calculated first.
To calculate the Cost of Debt, multiply the interest
expense associated with the debt by the inverse of the tax rate percentage,
and divide the result by the amount outstanding. Be sure to include any transactional
fees in the denominator (acquisition fees, premiums, discounts).
To calculate the Cost of Preferred Stock, simply divide
interest expense by the amount of preferred stock.
Visit the following page for more details on calculating
the Cost of Equity.
Now that all of its three components have been calculated,
they can be combined on a weighted average basis to derive the blended cost
of capital for a firm.
This is done by multiplying the cost of each component by
the amount of outstanding funding associated with it (see figure 2):

How Inflation Affects Cost of Capital and Profitability
Inflation has positive effects in the liabilities side of the balance sheet, as it diminishes the present value of monetary liabilities such as long term loans.
Nevertheless, this advantage does not usually fully compensate the negative effects ...






Analysis of Capital Investments
Should a firm accept the independent projects described below? Why or why not?
A) the firmīs cost of capital is 10 % and the estimated internal rate of return of the project is 11 %.
B) a capital investment requires a $150,000 initia...






Cost of Capital ( Equity Only)
We recently were required to calculate a charge in order to determine the economic value added. We used CAPM to calculate the cost of equity. We are a debt free company. Since we are not a listed company so we took the beta of the comparable listed c...






Cost of retained earnings
My question is how to calculate cost of capital in case a company has its funds only through equity shares & its reserves?
Then how to calculate cost of retained earnings (reserves). As it is a major constituent of company's long term funds....








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Cost of Capital Education & Events




Introduction and Calculation of WACC and its Components
Establishes an initial understanding of:
 Cost of Capital
 Cost of Equity
 Cost of Debt
 WACC
Includes calculation with c...
Usage (application): Initial Understanding and Calculation of WACC and Cost of Capital, Trainings, Workshops






Corporate Valuation for Businesses
Presentation that elaborates on corporate valuation, including the following sections:
1. Three types of value:
 Book Value
 Market V...
Usage (application): Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing






Introduction and Summary of Interest Rate Swap
Explanation of Base Rate Swaps.
A swap is an instrument that allows you to exchange a variable rate of a loan (that is linked to the base rate) f...
Usage (application): Initial Understanding of Interest Rate Swap






Cost of Capital Diagrams
Download and edit this 12manage PowerPoint graphic for limited personal, educational and business use.
Republishing in intranets, websites, books, ma...
Usage (application): Capital Budgeting






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Instead of the term (Weighted Average) Cost of Capital you often
find its acronym: WACC.
Compare with Cost of Capital: Cost
of Equity  WACC 
Capital Asset Pricing Model 
Internal Rate of Return
Return to Management Hub: Decisionmaking & Valuation  Finance & Investing
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