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Opportunity Costs, Cost of Capital, Interest Compounding Periods

A. Read the statements below and write your comments to it, need to support your writing (references).

1. Opportunity cost of finance - The cost of capital is an opportunity cost of finance, because it is the minimum return which an investor requires.

2. The cost of capital has two aspects to it - The cost of funds that a company raises and uses, and the return that investors expect to be paid for putting funds into the company.

B. Problems. Explain, also do calculations

1. If a firm's earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True of false? Explain.

2. Would you rather have a savings account that pays 5% interest compounded semi-annually or one that pays 5% interest compound daily? Explain.

Solution Preview

A. Read the statements below and write your comments to it, need to support your writing (references).

1. Opportunity cost of finance - The cost of capital is an opportunity cost of finance, because it is the minimum return which an investor requires.

The opportunity cost is generally defined as the foregone cost of investing in one alternative over another. In this same regards, the opportunity cost of finance within the cost of capital as part of is due to the return in dividends that investors require for putting in their money, plus the capital gain through the appreciation of the company's capital base or shareholding. Investors put their money into companies, which basically boosts the company's core capital base from a financial perspective. It is this light then that investors feel that since they could as well have put their money elsewhere for another gain, then a minimum return is expected, ...

Solution Summary

The following posting answers questions regarding opportunity costs, cost of capital and compounded interest.

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