Solving The Cost Of Capital

Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

The weighted average cost of capital is the rate that a company is expected to pay on average to all its security holders to finance its assets.

The cost of equity is the theoretical return that equity investors expect or receive from the company for investing their funds in the company. The risk free rate that is the Government Treasury bill rate is 3.1%, the market risk premium is 7% and the beta has been calculated as

In practice, the factors affecting cost of capital include capital structure policy, dividend policy, investment policy, level of interest rates and tax rates.

Given that the cost of equity is 9.4% and the cost of debt is 12.2%, Star’s cost of capital can be calculated as 9.14% (Appendix B). The company was also considering raising the cost of debt to the industry average of 19%. At this cost of debt, Star Company would have a lower cost of capital of 8.24% (Appendix B) because interest on debt capital is deductible whereas dividend payments on equity capital are not.

Should the corporate cost of capital as developed above be used for all projects? If not, what type of adjustments should be made?

Explain the advantages and disadvantages to use the CAPM model as the method to compute the cost of common equity. Compare and contrast

Cost of capital is what it will cost the firm, on the margin, today, to secure its financial resources for further growth.

The mixture of debt-equity mix is important so as to maximize the stock price of the Costco. However, it will be significant to consider the Weighted Average Cost of Capital (WACC) as well so that it can evaluate the company targeted capital structure. Cost of capital (OC) may be used by the companies as for long term decision making, so industries that faced to take the important of Cost of capital seriously may not make the right choice by choosing the right project(Gitman’s, ).

The three components of the cost of capital are debt, preferred stock, and common stock.

Basu, C. (n.d.). Difference between Market Value and Intrinsic Value. Retrieved October 17, 2014 from http://finance.zacks.com/difference-between-market-value-intrinsic-value-2991.html

Heinz has reached an unstable point in its business cycle and must calculate an appropriate cost of capital during these uncertain times. The cost of capital is an essential measure in determining the cost of a company’s capital structure. It is the

3) What is the weighted average cost of capital and why is it important to estimate it? Is the

1. Why is Lex Service PLC concerned about its cost of capital in 1993? What role will an estimate of the cost of capital play within Lex? In general, how can and do companies make use of cost of capital estimates?

This article mainly discusses the cost of capital, the required return necessary to make a capital budgeting project worthwhile. Cost of capital includes the cost of debt and the cost of equity. Theorist conclude that the cost of capital to the owners of a firm is simply the rate of interest on bonds.