Calculation of cost of capital, marginal cost, WACC
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After looking at the project and talking with some people that have been around the organization for many years, you recognize that the 10% cost of capital is not reflective of the company's current cost of capital. The head of treasury has assured you that the company can raise debt at 7% in today's market and that if the firm was not going to use the US$4M to invest in the machine for the production plant, it would be invested in some short-term securities yielding 5%.
With this in mind, explain 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? Assume you are leading a discussion on these elements with the managers and finance personnel.
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The response addresses the queries posted in 933 words with references.
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The response addresses the queries posted in 933 words with references.
//While assessing any project or generating funds for the project, companies need to take care of the cost of funds that they are receiving. Understanding the concepts of the cost of capital holds importance for the firms, since; they assist the companies in selecting the correct source of the fund and determining its cost of financing. We should discuss certain concepts of cost of capital and start the introduction of cost of capital like this: //
Cost of capital is a term widely used in the corporate world. Company's cost of capital is the cost that the company needs to pay its investors against the funds received by the company. Investors invest in the company with the expectation of receiving returns on their investment. Thus, cost of capital is that cost that it expects to pay to its investors against the funds received. It can also be said that it is the minimum amount of return that the firm needs to earn to satisfy its investors (Brealey, 2007).If the company can raise capital at the rate of 7%; its cost of capital will be 7%. Cost of capital is determined for the long term sources, and it doesn't get affected by the short term sources.
//As we have discussed about the cost of capital, we should now, move forward and discuss how the cost of capital is calculated. There are different ways of calculating ...
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- MBA (IP), International Center for Internationa Business
- BBA, University of Rajasthan
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