cost of capital - Phase 3 Discussion Board Kylie Paxton The...

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Phase 3 Discussion Board Kylie Paxton The cost of capital can be viewed two ways. It can be viewed as the expected rate of return that the company must earn in order to cover the cost of generating funds in the marketplace, or it can be viewed as the rate in which the company is required to pay in order to borrow funds. Investors generally only want to invest into a company or any other investment that pays the required rate of return in order to compensate them for the risk of investing their funds and companies generally only want to invest into projects that will reap a benefit greater than their current cost of capital. The cost of capital is often used as a guideline to evaluate the profitability of varying investment opportunities (Simkins, n.d.). The primary focus of any company is to create value for its shareholders by earning a return on any of the company’s invested funds that are above the current cost of capital. The weighted average cost of capital (WACC) is a direct expression of this cost and is often used to determine if a specific project or other investment opportunity would be a worthwhile investment for the company (WACC-Weighted Average Cost of Capital, n.d.). Many think of the WACC as the weighted average return on an investment. The WACC is an important concept in terms of valuating stock and capital budgeting.
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