Discussion Question(s) #1 Please reply to this thread by or before Wednesday, day 2 with your answers! • What are main elements in calculating the cost of capital? How would an increase in debt affect it? How would you identify an organization’s optimal cost of capital? What are main elements in calculating the cost of capital? The main elements in calculating cost of capital are, cost of debt and cost of equity. Quantifying and setting these costs enables the calculation of cost of capital. The cost of debt is the rate of interest paid. This rate of interest includes a basic rate on a risk-free bond with similar terms plus a default premium, or added component of the rate due to the risk inherent in the investment. Cost of equity is the rate of return of the investment required by the shareholders, usually adjusted upwards for risk. Cost of equity is generally set by the market. How would an increase in debt affect it? An increase in debt is accompanied by an increase in the cost of capital. This increase in the cost
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