cost of capital assignment

• Business Essentials
• Leadership & Management
• Credential of Leadership, Impact, and Management in Business (CLIMB)
• Entrepreneurship & Innovation
• *New* Digital Transformation
• Finance & Accounting
• Business in Society
• For Organizations
• Support Portal
• Media Coverage
• Founding Donors
• Leadership Team

• Harvard Business School →
• HBS Online →
• Business Insights →

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

• Career Development
• Communication
• Decision-Making
• Earning Your MBA
• Negotiation
• News & Events
• Productivity
• Staff Spotlight
• Student Profiles
• Work-Life Balance
• Alternative Investments
• Business Analytics
• Business Strategy
• Business and Climate Change
• Design Thinking and Innovation
• Digital Marketing Strategy
• Disruptive Strategy
• Economics for Managers
• Entrepreneurship Essentials
• Financial Accounting
• Global Business
• Launching Tech Ventures
• Leadership Principles
• Leadership, Ethics, and Corporate Accountability
• Leading with Finance
• Management Essentials
• Negotiation Mastery
• Organizational Leadership
• Power and Influence for Positive Impact
• Strategy Execution
• Sustainable Business Strategy
• Sustainable Investing
• Winning with Digital Platforms

Cost of Capital: What It Is & How to Calculate It

• 19 May 2022

There’s a common question that nearly every business leader and stakeholder has heard at least once: Is it in the budget?

While reviewing balance sheets and other financial statements can help answer this question, a firm grasp of financial concepts—such as cost of capital—is critical to doing so.

Stakeholders who want to articulate a return on investment—whether a systems revamp or new warehouse—must understand cost of capital. Here’s an overview of cost of capital, how it’s calculated, and how it impacts business and investment decisions alike.

What Is Cost of Capital?

Cost of capital is the minimum rate of return or profit a company must earn before generating value. It’s calculated by a business’s accounting department to determine financial risk and whether an investment is justified.

Company leaders use cost of capital to gauge how much money new endeavors need to generate to offset upfront costs and achieve profit. They also use it to analyze the potential risk of future business decisions.

Cost of capital is extremely important to investors and analysts. These groups use it to determine stock prices and potential returns from acquired shares. For example, if a company’s financial statements or cost of capital are volatile, cost of shares may plummet; as a result, investors may not provide financial backing.

Access your free e-book today.

How to Calculate Cost of Capital

To determine cost of capital, business leaders, accounting departments, and investors must consider three factors: cost of debt, cost of equity, and weighted average cost of capital (WACC).

1. Cost of Debt

While debt can be detrimental to a business’s success, it’s essential to its capital structure. Cost of debt refers to the pre-tax interest rate a company pays on its debts, such as loans, credit cards, or invoice financing. When this kind of debt is kept at a manageable level, a company can retain more of its profits through additional tax savings.

Companies typically calculate cost of debt to better understand cost of capital. This information is crucial in helping investors determine if a business is too risky. Cost of debt also helps identify the overall rate being paid to use funds acquired from financial strategies, such as debt financing, which is selling a company’s debt to individuals or institutions who, in turn, become creditors of that debt.

There are many ways to calculate cost of debt. One common method is adding your company’s total interest expense for each debt for the year, then dividing it by the total amount of debt.

Another formula that businesses and investors can use to calculate cost of debt is:

Cost of Debt = (Risk-Free Rate of Return + Credit Spread) × (1 – Tax Rate)

Here’s a breakdown of this formula’s components:

• Risk-free return: Determined from the return on US government security
• Credit spread: Difference in yield between US Treasury bonds and other debt securities
• Tax rate: Percentage at which a corporation is taxed

Companies in the early stages of operation may not be able to leverage debt in the same way that well-established corporations can. Limited operating histories and assets often force smaller companies to take a different approach, such as equity financing, which is the process of raising capital through selling company shares.

2. Cost of Equity

Equity is the amount of cash available to shareholders as a result of asset liquidation and paying off outstanding debts, and it’s crucial to a company’s long-term success.

Cost of equity is the rate of return a company must pay out to equity investors. It represents the compensation that the market demands in exchange for owning an asset and bearing the risk associated with owning it.

This number helps financial leaders assess how attractive investments are—both internally and externally. It’s difficult to pinpoint cost of equity, however, because it’s determined by stakeholders and based on a company’s estimates, historical information, cash flow, and comparisons to similar firms.

Cost of equity is calculated using the Capital Asset Pricing Model (CAPM), which considers an investment’s riskiness relative to the current market.

To calculate CAPM, investors use the following formula:

Cost of Equity = Risk-Free Rate of Return + Beta × (Market Rate of Return - Risk-Free Rate of Return)

• Average rate of return: Estimated by stocks, such as Dow Jones
• Return risk: Stock’s beta, which is calculated and published by investment services for publicly held companies

Companies that offer dividends calculate the cost of equity using the Dividend Capitalization Model. To determine cost of equity using the Dividend Capitalization Model, use the following formula:

Cost of Equity = (Dividends per Share / Current Market Value of Stocks) + (Dividend Growth Rate)

• Dividends: Amount of money a company pays regularly to its shareholders
• Market value stocks: Fractional ownership of equity in an organization that’s value is determined by financial markets
• Dividend growth rate: Annual percentage rate of growth of a dividend over a period

3. Weighted Average Cost of Capital (WACC)

The weighted average cost of capital (WACC) is the most common method for calculating cost of capital. It equally averages a company’s debt and equity from all sources.

Companies use this method to determine rate of return, which indicates the return that shareholders demand to provide capital. It also helps investors gauge the risk of cash flows and desirability for company shares, projects, and potential acquisitions. In addition, it establishes the discount rate for future cash flows to obtain value for a business.

WACC is calculated by multiplying the cost of each capital source (both equity and debt) by its relevant weight by market value, then adding the products together to determine the total. The formula is:

WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))

• E: Market value of firm’s equity
• D: Market value of firm’s debt
• V: Total value of capital (equity + debt)
• E/V: Percentage of capital that’s equity
• D/V: Percentage of capital that’s debt
• Re: Required rate of return
• Rd: Cost of debt
• T: Tax rate

A high WACC calculation indicates that a company’s stock is volatile or its debt is too risky, meaning investors will demand greater returns.

Why Is the Cost of Capital So Important?

Beyond cost of capital’s role in capital structure, it indicates an organization's financial health and informs business decisions. When determining an opportunity’s potential expense, cost of capital helps companies evaluate the progress of ongoing projects by comparing their statuses against their costs.

Shareholders and business leaders analyze cost of capital regularly to ensure they make smart, timely financial decisions. In an ideal world, businesses balance financing while limiting cost of capital.

Is Your Idea Worth the Investment?

Cost of capital enables business leaders to justify and garner support for proposed ideas, decisions, and strategies. Stakeholders only back ideas that add value to their companies, so it’s essential to articulate how yours can help achieve that end.

Want to learn more about how understanding cost of capital can help drive business initiatives? Explore Leading with Finance and our other online finance and accounting courses . D ownload our free course flowchart to determine which best aligns with your goals.

About the Author

• Corporate Finance Assignment Help
• Stock Valuation Assignment Help
• Insurance Assignment Help
• Financial Planning Assignment Help
• Managerial Finance Assignment Help
• Econometrics Assignment Help
• Financial Engineering Assignment Help
• Quantitative Finance Assignment Help
• Financial Market Analysis Assignment Help
• Auditing and Assurance Assignment Help
• Capital Markets Assignment Help
• Bond Valuation Assignment Help
• Mergers and Acquisitions Assignment Help
• Financial Forecasting Assignment Help
• Financial Markets Assignment Help
• Investment Banking Assignment Help
• Portfolio Management Assignment Help
• Financial Modeling Assignment Help
• Financial Reporting Assignment Help
• Banking Assignment Help
• Financial Mathematics Assignment Help
• Public Finance Assignment Help
• Valuation Methods Assignment Help
• Applied Finance Assignment Help
• Corporate Taxation Assignment Help
• Capital Asset Pricing Model (CAPM) Assignment Help
• Financial Counselling Assignment Help
• Financial Technology Assignment Help
• Personal Investment Planning Assignment Help
• Financial Services Assignment Help
• Business Finance Assignment Help

Unleashing Your Potential: Writing Stellar Assignments on Cost of Capital

It's crucial to comprehend the cost of capital concept when making financial and investment decisions. The rate of return that lenders and investors need to invest in a specific project or business is known as the cost of capital. Understanding and analyzing the various elements and calculations related to the cost of capital is essential for finance students. This blog will walk you through the steps of writing an assignment on the cost of capital, giving you the framework you need and important ideas to keep in mind. You will build a strong foundation for your assignment by investigating the meaning and importance of the cost of capital. You will also have the skills and knowledge needed to excel in your finance assignment if you comprehend the theoretical underpinnings, factors that affect the cost of capital, and how to conduct a cost of capital analysis. You can create a well-organized and educational assignment on the cost of capital by using the suggested structure and incorporating the steps discussed. So let's explore this subject in greater detail and uncover the crucial information that will enable you to create an engaging assignment.

Understanding the Concept of Cost of Capital

It is important to have a firm grasp of the concept of cost of capital before getting into the specifics of writing an assignment on it. We will examine the definition and importance of the cost of capital in this section. You will be better prepared to evaluate the cost of capital implications and applications within the context of finance if you have a clear understanding of what it entails. You can explore the various components and calculations of the cost of capital by starting with an understanding of what it is. Additionally, understanding the importance of the cost of capital in financial decision-making processes is crucial for assessing investment opportunities and figuring out whether projects are feasible. You will be able to navigate the complexities of the cost of capital and effectively apply it to your assignment by fully understanding the concept's significance and meaning.

Definition of Cost of Capital

The weighted average cost of the various funding sources that a business uses to finance its operations is known as the cost of capital. These sources typically consist of preferred stock, debt, and equity. The cost of each capital source varies, depending on things like interest rates, dividend expectations, and investor requirements. The proportions and costs of each funding source within the capital structure of the company are taken into account to determine the overall cost of capital. It stands for the lowest rate of return that lenders and investors will accept to finance the company's projects and investments.

Significance of Cost of Capital

In the world of finance, the importance of the cost of capital cannot be overstated. It is essential for determining whether investment opportunities for businesses will be profitable and viable. Businesses can allocate resources wisely by weighing the expected returns from a particular project or investment against the firm's cost of capital. The project is likely to add value and may be deemed financially feasible if the anticipated returns on investment exceed the cost of capital. On the other hand, the investment might not be financially viable and might even detract from shareholder value if the anticipated returns are lower than the cost of capital. Because of this, the cost of capital is a useful metric that businesses can use to assess and rank investment options according to their profitability and risk-reward profile.

Structuring Your Assignment on Cost of Capital

It is crucial to establish a sound framework for your assignment to guarantee its effectiveness and coherence. We will outline the suggested structure for your cost of capital assignment in this section. This format will help you present your ideas in a logical and structured way, making it easier for your readers to understand and follow along. Your ability to present the necessary data and analysis methodically will improve the overall flow and coherence of your work if you have a well-structured assignment on the cost of capital. It enables a clear progression of ideas and guarantees that all pertinent facets of the subject are thoroughly covered. You can produce an assignment that effectively communicates your comprehension of the cost of capital and demonstrates your analytical and writing abilities by following the suggested structure presented in this section.

Introduction

Start with a strong introduction to your cost of capital assignment. Give a succinct introduction to the subject, emphasizing its importance in financial decision-making. Clearly state the assignment's goal, whether it be to investigate the cost of capital calculation techniques or to examine how it affects investment choices. Stress the significance of the cost of capital as a key idea that enables companies to evaluate the viability and profitability of their investment projects. This will establish the tone for your essay and draw the reader in, ensuring that they are aware of the relevance and purpose of your work.

Theoretical Background

Explore the theoretical underpinnings of the cost of capital in this section. Investigate the various capital sources, such as equity, debt, and preferred stock, and clarify the various costs related to each source. Describe the weighted average cost of capital (WACC) calculation, taking into account the costs and proportions of each funding source in the capital structure of the company. Provide relevant formulas and examples that clarify the calculation process and its practical application to improve understanding. Investigating the theoretical underpinnings of the cost of capital will give the subsequent analysis and evaluation a strong foundation.

Factors Affecting the Cost of Capital

Examine the various elements that affect a company's cost of capital in the section that follows. Talk about the key elements influencing the cost of capital, such as market conditions, interest rates, the company's credit rating, and the sector in which it operates. Describe how adjustments to these variables may affect the cost of capital, which has an impact on investment choices. Give each factor a thorough analysis, emphasizing its importance and any potential repercussions. You will gain a deeper understanding of the dynamic nature of this concept and its relevance in the decision-making process by looking at the variables that affect the cost of capital.

Conducting a Cost Capital Analysis

After learning about the theoretical underpinnings of the cost of capital, it is essential to move on to its actual application. We will go into detail about the procedures for carrying out a cost of capital analysis in this section. You will discover how to accurately estimate and evaluate the cost of capital for a business or project by investigating these steps. You can make investment decisions by using a cost of capital analysis to determine the rate of return needed by lenders and investors. You can determine the weighted average cost of capital (WACC) and deduce its implications using this analysis. Understanding the steps involved in conducting a cost of capital analysis is crucial for accurately assessing the financial viability and profitability of investment opportunities. By looking at the practical aspects of the cost of capital analysis, you will acquire the skills to apply this concept in real-world scenarios.

Step 1: Identify the Sources of Capital

Identifying and compiling data on the company's sources of capital is the first step in conducting a cost-of-capital analysis. These sources might include debt, preferred stock, and equity. Get information on the relative costs of each source and the proportions of each source in the capital structure of the company. For accurate cost of capital calculations, it is essential to comprehend the capital structure of the company.

Step 2: Calculate the Weighted Average Cost of Capital (WACC)

Calculate the weighted average cost of capital (WACC) after identifying the capital sources. Give each source the proper weights by their proportions in the capital structure of the company. Consider factors like interest rates, dividends, and investor expectations when calculating the cost of each source. Calculate the final WACC figure using the WACC formula, which takes these weighted costs into account. This step is essential because it offers a thorough evaluation of the firm's overall cost of capital.

Step 3: Interpret and Analyze the Results

The results of the WACC calculation must be interpreted and examined. Determine if the company's return on investment is greater than the estimated cost of capital. Analyze how the analysis will affect the company's investment and financial decisions. Identify any gaps or differences from the intended results, and then make insightful recommendations in light of your findings. By providing the management and stakeholders of the company with actionable insights from the calculated numbers, this step enhances the value of the cost of capital analysis. The cost of capital analysis contributes to informed decision-making processes when the results are effectively interpreted and analyzed.

Summarise the key ideas discussed in the earlier sections to bring your assignment on the subject of the cost of capital to a close. Be sure to emphasize how crucial it is to comprehend and correctly calculate the cost of capital when making financial decisions. Encourage additional study and investigation in the area while emphasizing its dynamism and potential for progress. You can create a thorough assignment that demonstrates your knowledge by adhering to the suggested structure and including pertinent information. For academic integrity and to ensure credibility, use the proper references and citations. Writing an assignment on the cost of capital requires a firm understanding of theoretical underpinnings, proficiency with data analysis, and strong communication abilities. You can create a well-written assignment that demonstrates your understanding of the cost of capital by devoting time and effort to understanding the concepts and adhering to the suggested structure.

Post a comment...

• Search Search Please fill out this field.
• What Is WACC?

Understanding WACC

Wacc formula and calculation, explaining the formula elements.

• WACC vs. RRR

Limitations of WACC

Example of how to use wacc, the bottom line.

• Corporate Finance
• Financial Ratios

Weighted Average Cost of Capital (WACC): Definition and Formula

How investors and companies themselves use this key metric

What Is Weighted Average Cost of Capital (WACC)?

Weighted average cost of capital (WACC) represents a company's average after-tax cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. As such, WACC is the average rate that a company expects to pay to finance its business.

WACC is a common way to determine required rate of return (RRR) because it expresses, in a single number, the return that bondholders and shareholders demand to provide the company with capital . A company's WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky, because investors will want greater returns to compensate them. 

Key Takeaways

• Weighted average cost of capital (WACC) represents a company's cost of capital, with each category of capital (debt and equity) proportionately weighted.
• WACC can be calculated by multiplying the cost of each capital source by its relevant weight in terms of market value, then adding the results together to determine the total.
• WACC is commonly used as a hurdle rate against which companies and investors can gauge the desirability of a given project or acquisition.
• WACC is also used as the discount rate for future cash flows in discounted cash flow analysis.

Jessica Olah / Investopedia

Calculating a company's WACC is useful for investors and stock analysts, as well company management, although they may use it for different purposes.

In corporate finance, determining a company's cost of capital can be important for a couple of reasons. For instance, WACC can be used as the discount rate for estimating the net present value of a project or acquisition.

If the company believes that a merger, for example, will generate a return higher than its cost of capital, then it's likely a good choice for the company. However, if it anticipates a return lower than its investors are expecting, then it might want to put its capital to better use.

To investors, WACC is an important tool in assessing a company's potential for profitability. In most cases, a lower WACC indicates a healthy business that's able to attract money from investors at a lower cost. By contrast, a higher WACC usually coincides with businesses that are seen as riskier and need to compensate investors with higher returns. 

If a company only obtains financing through one source—say, common stock—then calculating its cost of capital would be relatively simple. If investors expected a rate of return (RoR) of 10% on their shares , the company's cost of capital would be the same as its cost of equity: 10%. 

The same would be true if the company only used debt financing. For example, if the company paid an average yield of 5% on its bonds, its cost of debt would be 5%. This is also its cost of capital.

However many companies use both debt and equity financing in various proportions, which is where WACC comes in.

WACC = ( E V × R e ) + ( D V × R d × ( 1 − T c ) ) where: E = Market value of the firm’s equity D = Market value of the firm’s debt V = E + D R e = Cost of equity R d = Cost of debt T c = Corporate tax rate \begin{aligned} &\text{WACC} = \left ( \frac{ E }{ V} \times Re \right ) + \left ( \frac{ D }{ V} \times Rd \times ( 1 - Tc ) \right ) \\ &\textbf{where:} \\ &E = \text{Market value of the firm's equity} \\ &D = \text{Market value of the firm's debt} \\ &V = E + D \\ &Re = \text{Cost of equity} \\ &Rd = \text{Cost of debt} \\ &Tc = \text{Corporate tax rate} \\ \end{aligned} ​ WACC = ( V E ​ × R e ) + ( V D ​ × R d × ( 1 − T c ) ) where: E = Market value of the firm’s equity D = Market value of the firm’s debt V = E + D R e = Cost of equity R d = Cost of debt T c = Corporate tax rate ​

WACC is calculated by multiplying the cost of each capital source (debt and equity) by its relevant weight and then adding those results together. In the above formula, E/V represents the proportion of equity-based financing, while D/V represents the proportion of debt-based financing. The WACC formula thus involves the summation of two terms:

( E V × R e ) \left ( \frac{ E }{ V} \times Re \right ) ( V E ​ × R e )

( D V × R d × ( 1 − T c ) ) \left ( \frac{ D }{ V} \times Rd \times ( 1 - Tc ) \right ) ( V D ​ × R d × ( 1 − T c ) )

The former represents the weighted value of equity capital, while the latter represents the weighted value of debt capital.

Suppose that a company obtained $1 million in debt financing and $4 million in equity financing by selling common shares. E/V would equal 0.8 ($4,000,000 ÷ $5,000,000 of total capital) and D/V would equal 0.2 ($1,000,000 ÷ $5,000,000 of total capital). 

WACC can be calculated using Excel. The biggest challenge is sourcing the correct data to plug into the model. See Investopedia's explanation of how to calculate WACC in Excel .

Cost of equity (Re in the formula) can be a bit tricky to calculate because share capital does not technically have an explicit value. When companies reimburse bondholders, the amount they pay has a predetermined interest rate . On the other hand, equity has no concrete price that the company must pay. As a result, companies have to estimate the cost of equity—in other words, the rate of return that investors demand based on the expected volatility of the stock.

Because shareholders will expect to receive a certain return on their investment in a company, the equity holders' required rate of return is a cost from the company's perspective; if the company fails to deliver this expected return, shareholders may simply sell their shares, which can lead to a decrease in both share price and the company's value. The cost of equity, then, is essentially the total return that a company must generate to maintain a share price that will satisfy its investors.

Companies typically use the capital asset pricing model (CAPM) to arrive at the cost of equity (in CAPM, it's called the expected return of investment). Again, this is not an exact calculation because companies have to lean on historical data, which can never accurately predict future growth.

Determining cost of debt (Rd in the formula), on the other hand, is a more straightforward process. This is often done by averaging the yield to maturity for a company's outstanding debts. This method is easier if you're looking at a publicly traded company that has to report its debt obligations.

For privately owned companies, one can look at the company's credit rating from firms such as Moody's and S&P Global and then add a relevant spread over risk-free assets (for example, Treasury bonds of the same maturity) to approximate the return that investors would demand.

Businesses are able to deduct interest expenses from their taxes. Because of this, the net cost of a company's debt is the amount of interest it is paying minus the amount it was able to deduct on its taxes. This is why Rd x (1 - the corporate tax rate) is used to calculate the after-tax cost of debt.

WACC vs. Required Rate of Return (RRR)

The required rate of return is the minimum rate that an investor will accept. If they expect a smaller return than they require, they'll put their money elsewhere.

One way to determine the RRR is by using the CAPM, which looks at a stock's volatility relative to the broader market (its beta ) to estimate the return that stockholders will require.

Another method for identifying the RRR is by calculating WACC. The advantage of using WACC is that it takes the company's capital structure into account—that is, how much it leans on debt financing vs. equity.

The WACC formula seems easier to calculate than it really is. Because certain elements of the formula, such as the cost of equity, are not consistent values, various parties may report them differently for different reasons. As such, although WACC can often offer valuable insight into a company, one should always use it along with other metrics in deciding whether to invest.

More complex balance sheets, such as for companies using multiple types of debt with various interest rates, make it more difficult to calculate WACC. In addition, there are many inputs to calculating WACC —such as interest rates and tax rates—all of which can be affected by market and economic conditions.

Consider a hypothetical manufacturer called XYZ Brands. Suppose the market value of the company's debt is $1 million, and its market capitalization (or the market value of its equity) is $4 million. 

Let's further assume that XYZ's cost of equity—the minimum return that shareholders demand—is 10%. Here, E/V would equal 0.8 ($4,000,000 of equity value divided by $5,000,000 of total financing). Therefore, the weighted cost of equity would be 0.08 (0.8 × 0.10). This is the first half of the WACC equation.

Now we have to figure out XYZ's weighted cost of debt. To do this, we need to determine D/V; in this case, that's 0.2 ($1,000,000 in debt divided by $5,000,000 in total capital). Next, we would multiply that figure by the company's cost of debt, which we'll say is 5%. Last, we multiply the product of those two numbers by 1 minus the tax rate. So if the tax rate is 0.25, then "1 minus Tc" is equal to 0.75. 

In the end, we arrive at a weighted cost of debt of 0.0075 (0.2 × 0.05 × 0.75). When that's added to the weighted cost of equity (0.08), we get a WACC of 0.0875, or 8.75% (0.08 weighted cost of equity + 0.0075 weighted cost of debt).

That represents XYZ's average cost to attract investors and the return that they're going to expect, given the company's financial strength and risk compared with other investment opportunities. 

What Is a Good Weighted Average Cost of Capital (WACC)?

What represents a "good" weighted average cost of capital will vary from company to company, depending on such factors as whether it is an established business or a startup, its capital structure, and the industry in which it operates. One way to judge a company's WACC is to compare it to the average for its industry or sector. For example, according to Kroll research, the WACC for companies in the consumer staples sector was 8.4%, on average, in June 2023, while it was 11.4% in the information technology sector.

What Is Capital Structure?

Companies use various means to obtain the capital they need, which can include issuing bonds (debt) and shares of stock (equity). Capital structure refers to how they mix the two.

What Is a Debt-to-Equity Ratio?

A debt-to-equity ratio is another way of looking at the risk that investing in a particular company may hold. It compares a company's liabilities to the value of its shareholder equity. The higher the debt-to-equity ratio, the riskier a company is often considered to be.

Weighted average cost of capital (WACC) is a useful measure for both investors and company executives. However, it can be difficult to compute with accuracy and usually should not be relied on all by itself.

CFA Journal. " What Is the Weighted Average Cost of Capital (WACC)? Definition, Formula, and Example ."

Harvard Business School Online. " Cost of Capital: What It Is & How to Calculate It ."

Internal Revenue Service. " Topic No. 505 Interest Expense ."

Nasdaq. " Required Rate of Return (RRR) ."

Kroll. " U.S. Industry Benchmarking Module ."

Harvard Business Review. " A Refresher on Debt-to-Equity Ratio ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• Study Guides
• Homework Questions

Assignment 1 - Cost of Capital

Cost of capital

Cost of capital is the expense of funds used for financing a profitable business. Cost of capital depends on the mode connected with financing used – the item refers to the expense of equity if the organization is financed only through equity, or to the expense of debt if it truly is financed solely as a result of debt. Many companies use combining debt and money to finance their particular businesses, and regarding such companies, their overall expense of capital is derived from a weighted average of most capital sources, known as the weighted common cost of capital (WACC).

Accrued Dividend

Differences in net operating income under variable costing and absorption costing, financial accounting foundation (faf), cost volume profit analysis, what is barometer, methods of computation of conveyance loss, critics of neoclassical economics, responding letter to the request to your resume, annual report 2010 of basic bank limited, methods of accounting for price level changes, latest post, cyclopentyne, photoionization detector, photosynthetic mechanism of purple sulfur bacteria suited to low-calcium conditions, scientists are uncovering the mysteries of red and grey squirrel competition, identifying the factors that make bacteria deadly, machine-tool dynamometer.

Cost of Capital Assignment Help

• Cost of Capital

Cost of capital is the expected rate of return that the market requires in order to attract funds to a particular investment. In economic terms, the cost of capital for a particular investment is an opportunity cost, the cost of forgoing the next best alternative investment. In this sense, it relates to the economic principle of substitution— that is, an investor will not invest in a particular asset if there is a more attractive substitute.

The cost of capital usually is expressed in percentage terms, that is, the annual amount of dollars that the investor requires or expects to realize, expressed as a percentage of the dollar amount invested.

Pointers regarding Cost of Capital are as follows:

1. Cost Of Capital Is Forward Looking

The cost of capital represents investors’ expectations . There are three elements to these expectations:

• The “real” rate of return—the amount investors expect to obtain in exchange for letting someone else use their money on a riskless basis
• Expected inflation—the expected depreciation in purchasing power while the money is tied up
• Risk—the uncertainty as to when and how much cash flow or other economic income will be received.

Cost of Capital Assignment Help By Online Tutoring and Guided Sessions from AssignmentHelp.Net

2. Cost Of Capital Is Based On Market Value, Not Book Value

The cost of capital is the expected rate of return on some base value. That base value is measured as the market value of an asset, not its book value. For example, the yield to maturity shown in the bond quotations in the financial press is based on the closing market price of a bond, not on its face value.

3. Cost Of Capital Equals Discount Rate

The essence of the cost of capital is that it is the percentage return that equates expected economic income with present value. The expected rate of return in this context is called a discount rate. A discount rate reflects both time value of money and risk and therefore represents the cost of capital.

4. Discount Rate Is Not The Same As Capitalization Rate

Discount rate and capitalization rate are two distinctly different concepts. Discount rate equates to cost of capital. It is a rate applied to all expected incremental returns to convert the expected return stream to a present value.

Email Based Assignment Help in Cost of Capital

Following are some of the topics in cost of capital in which we provide help:.

• Cost Components of a Company's Capital Structure
• Preferred Equity
• Common Stock or Partnership Interests
• Weighted average cost of capital

• MassiveMark Playground
• Transliteration Playground
• Professional Practice Test
• Assignmenthelp Services
• Custom Writing help
• Free Assignment Samples
• Free Homework Help Samples
• Terms of Use
• Refund Policy

Module 5: Job Order Costing

Introduction to accumulating and assigning costs, what you will learn to do: assign costs to jobs.

Financial and managerial accountants record costs of production in an account called Work in Process. The total of these direct materials, direct labor, and factory overhead costs equal the cost of producing the item.

In order to understand the accounting process, here is a quick review of how financial accountants record transactions:

Let’s take as simple an example as possible. Jackie Ma has decided to make high-end custom skateboards. She starts her business on July 1 by filing the proper forms with the state and then opening a checking account in the name of her new business, MaBoards. She transfers $150,000 from her retirement account into the business account and records it in a journal as follows:

For purposes of this ongoing example, we’ll ignore pennies and dollar signs, and we’ll also ignore selling, general, and administrative costs.

After Jackie writes the journal entry, she posts it to a ledger that currently has only two accounts: Checking Account, and Owner’s Capital.

Debits are entries on the left side of the account, and credits are entries on the right side.

Here is a quick review of debits and credits:

You can view the transcript for “Colin Dodds – Debit Credit Theory (Accounting Rap Song)” here (opens in new window) .

Also, this system of debits and credits is based on the following accounting equation:

Assets = Liabilities + Equity.

• Assets are resources that the company owns
• Liabilities are debts
• Equity is the amount of assets left over after all debts are paid

Let’s look at one more initial transaction before we dive into recording and accumulating direct costs such as materials and labor.

Jackie finds the perfect building for her new business; an old woodworking shop that has most of the equipment she will need. She writes a check from her new business account in the amount of $2,500 for July rent. Because she took managerial accounting in college, she determines this to be an indirect product expense, so she records it as Factory Overhead following a three-step process:

• Analyze transaction

Because her entire facility is devoted to production, she determines that the rent expense is factory overhead.

2. Journalize transaction using debits and credits

If she is using QuickBooks ® or other accounting software, when she enters the transaction into the system, the software will create the journal entry. In any case, whether she does it by hand or computer, the entry will look much like this:

3. Post to the ledger

Again, her computer software will post the journal entry to the ledger, but we will follow this example using a visual system accountants call T-accounts. The T-account is an abbreviated ledger. Click here to view a more detailed example of a ledger .

Jackie posts her journal entry to the ledger (T-accounts here).

She now has three accounts: Checking Account, Owner’s Capital, and Factory Overhead, and the company ledger looks like this:

In a retail business, rent, salaries, insurance, and other operating costs are categorized into accounts classified as expenses. In a manufacturing business, some costs are classified as product costs while others are classified as period costs (selling, general, and administrative).

We’ll treat factory overhead as an expense for now, which is ultimately a sub-category of Owner’s Equity, so our accounting equation now looks like this:

Assets = Liabilities + Owner’s Equity

147,500 = 150,000 – 2,500

Notice that debits offset credits and vice versa. The balance in the checking account is the original deposit of $150,000, less the check written for $2,500. Once the check clears, if Jackie checks her account online, she’ll see that her ledger balance and the balance the bank reports will be the same.

Here is a summary of the rules of debits and credits:

Assets = increased by a debit, decreased by a credit

Liabilities = increased by a credit, decreased by a debit

Owner’s Equity = increased by a credit, decreased by a debit

Revenues increase owner’s equity, therefore an individual revenue account is increased by a credit, decreased by a debit

Expenses decrease owner’s equity, therefore an individual expense account is increased by a debit, decreased by a credit

Here’s Colin Dodds’s Accounting Rap Song again to help you remember the rules of debits and credits:

Let’s continue to explore job costing now by using this accounting system to assign and accumulate direct and indirect costs for each project.

When you are done with this section, you will be able to:

• Record direct materials and direct labor for a job
• Record allocated manufacturing overhead
• Prepare a job cost record

Learning Activities

The learning activities for this section include the following:

• Reading: Direct Costs
• Self Check: Direct Costs
• Reading: Allocated Overhead
• Self Check: Allocated Overhead
• Reading: Subsidiary Ledgers and Records
• Self Check: Subsidiary Ledgers and Records
• Introduction to Accumulating and Assigning Costs. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution
• Colin Dodds - Debit Credit Theory (Accounting Rap Song). Authored by : Mr. Colin Dodds. Located at : https://youtu.be/j71Kmxv7smk . License : All Rights Reserved . License Terms : Standard YouTube License
• What the General Ledger Can Tell You About Your Business. Authored by : Mary Girsch-Bock. Located at : https://www.fool.com/the-blueprint/general-ledger/ . License : All Rights Reserved . License Terms : Standard YouTube License

Privacy Policy

Securing Higher Grades Costing Your Pocket? Book Your Assignment help at The Lowest Price Now!

[email protected]

Cost of Capital Assignment Help

• Assignment Topics
• Cost of Capital

Cost of capital can be defined as the cost of funds used for financing a business. Cost of capital depends on the mode of financing used–it refers to the cost of equity if the business is financed solely through equity or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses and for such companies, their overall cost of capital is derived as the weighted-average, after-tax cost of a corporation's long-term debt, preferred stock and the stockholders' equity associated with common stock, widely known as weighted average cost of capital (WACC). It also refers to the opportunity cost of making a specific investment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk. Thus, the cost of capital is the rate of return required to persuade the investor to make a given investment. From an investor's point of view, the cost of capital is the required return an investment must provide in order to be worth undertaking. From a company's point of view, the cost of capital refers to the cost of obtaining funds-debt or equity-to finance an investment.

The cost of various capital sources varies from company to company and depends on factors such as its operating history, profitability, credit worthiness, etc. In general, newer enterprises with limited operating histories will have higher costs of capital than established companies with a solid track record, since lenders and investors will demand a higher risk premium for the former.

The cost of debt is merely the interest rate paid by the company on such debt. However, since interest expense is tax-deductible, the after-tax cost of debt is calculated as: Yield to maturity of debt x (1 - T) where T is the company’s marginal tax rate.

The cost of equity is more complicated, since the rate of return demanded by equity investors is not as clearly defined as it is by lenders. Theoretically, the cost of equity is approximated by the Capital Asset Pricing Model (CAPM) = Risk-free rate + (Company’s Beta x Risk Premium).

Let's compute the cost of capital by assuming that a corporation has $40 million of long-term debt with an after-tax cost of 4%, $10 million of 7% preferred stock and $50 million of common stock and retained earnings with an estimated cost of 15%.

Weighted Average post tax cost of capital =

[($40 million X 4% = $1.6 million) + ($0.10 million X 7% = $0.7 million) + ($50 million X 15% = $7.5 million)]/$100 million = 9.8%

Cost of capital is an important component of business valuation work. Companies strive to attain the optimal financing mix, based on the cost of capital for various funding sources.

My Assignment Help Services By Online Tutoring and Guided Sessions

• Science Assignment Help
• Geography Homework Help
• Essay Assignment Help
• English Essay Assignment Help
• Humanities Assignment Asnwers Help
• Law Assignment Help
• Marketing Management Assignment Help
• Project Management Assignment Help
• Human Resources Assignment Services
• Help With Assignment
• Dissertation Writing Services
• C# Assignment Help
• Java Assignment Help
• Python Assignment Help
• CPM Homework Help
• Database Assignment Help
• Computer Networks Assignment Help
• IT Assignment Help
• Data Analytics Assignment Help
• Mathematics and computing Help
• Homework Help For Paper
• Assignment Writing Help
• Engineering Assignment Help
• Perdisco Assignment Help
• Finance Assignment Help
• Economics Assignment Help
• Statistics Assignment Help
• Arts and Architecture Help
• Strategy and Planning Help
• Nursing Assignment Help
• Health Informatics Assignment
• Homework Help for Me
• Case Studies Assignment Help