Solving The Cost Of Capital

801 WordsNov 9, 20154 Pages
Companies and investment funds are currently sitting on a lot of money. But before they start putting this capital into new use, it is important to understand more about the cost of financing their business through these different investments. In order to do so, businesses must calculate the cost of capital. But what is cost of capital and how can companies calculate it? This guide will answer these important questions and help you understand why cost of capital is among the most important business formulas you’ll need to understand. You’ll also be able to understand the common pitfalls and limitations of calculating this important figure for your business. What does the ‘cost of capital’ mean? The definition of cost of capital simple means it is the cost of funds the company uses to fund and finance its operations. The cost of capital is often divided into two separate modes of financing: debt and equity. Cost of capital tells the company its hurdle rate. The hurdle rate refers to the minimum rate of return the company must achieve to be profitable or to generate value. Each company has its own cost of capital. Different factors influence the cost of capital and these include things such as the operating history of the business, its profitability and credit worthiness. The figure is one of the most essential parts of a business’ financing, as it can help the company to make better funding and investment decisions and thus boost its overall financial health. In

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