cost of capital - What are the main elements in calculating...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
What are the main elements in calculating cost of capital? How would an increase in debt affect the cost of capital? How would you identify the optimal cost of capital for a organization? "Cost of capital" is defined as "the opportunity cost of all capital invested in an enterprise." Let's dissect this definition: "Opportunity cost" is what you give up as a consequence of your decision to use a scarce resource in a particular way. "All capital invested" is the total amount of cash invested into a business. "In an enterprise" refers to the fact that we are measuring the opportunity cost of all sources of capital which include debt and equity. How Do We Calculate a Company's Weighted Average Cost of Capital? We calculate a company's weighted average cost of capital using a 3 step process: 1. Cost of capital components. First, we calculate or infer the cost of each kind of capital that the enterprise uses, namely debt and equity. A. Debt capital. The cost of debt capital is equivalent to actual or imputed interest rate on
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 2

cost of capital - What are the main elements in calculating...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online