Cost of capital and how it is calculated
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Please provide an explanation of a company's cost of capital and how it is calculated. What is marginal cost of capital and how does it differ from weighted average cost of capital? How do market rates and the company's perceived market risk impact its cost of capital? Provide reference sites that I can use for research.
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A calculation for the cost of capital and how it is calculated is given.
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The weighted average cost of capital is the required rate of return that a firm must achieve in order to cover the cost of generating funds in the marketplace. Another way to think of the cost of capital is as the opportunity cost of funds, since this represents the opportunity cost for investing in assets with the same risk as the firm. Thus it can also be viewed as the minimum rate of return required keeping investors satisfied. Thus it is used to know the rate of return expected by the investors.
Cost of capital (WACC)=
(Cost of Equity x Proportion of equity from capital)+ (Cost of debt x Proportion of ...
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