1. Explain a company's cost of capital and how it is calculated.
2. What is marginal cost of capital and how does it differ from weighted average cost of capital?
3. How do market rates and the company's perceived market risk impact its cost of capital?
The cost of capital for a firm is a weighted sum of the cost of equity and the cost of debt. Firms finance their operations by three mechanisms: issuing stock (equity), issuing debt (borrowing from a bank) and reinvesting prior earnings (internal financing). Cost of capital is used to determine the risk characteristics of a project. The following formula is usually used to determine the cost of capital:
WACC = (1 ...
The solution explains the concept of cost of capital (WACC, marginal cost and cost of equity) in approximately 300 words.