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Understanding "company's cost of capital" definiton?

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  • 14-09-2011 12:56pm
    #1
    Baz5789
    Registered Users Posts: 19 ✭


    Hey there,

    Im studying finance at the moment and am having trouble getting to grips with the term "company's cost of capital". I checked afew different definitions online and in my book and was just wondering if I have it right when i say:

    "It is the expected rate of return (on a loan or shares) the company pays for capital when the risk of all its current debt and equity/stock obligations are taken into account?"

    Cheers for any help. Its just its the foundation of the chapter and i want to be sure I know what im actually working out :)

    Thanks
    baz5789


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    #2
    mari2222
    Registered Users Posts: 568 ✭✭✭mari2222


    What a badly written book! you might get some help in the accountancy forum.


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    #3
    cerebus
    Registered Users Posts: 447 ✭✭cerebus


    You can think of it as the average rate of return demanded by investors in a company's debt and equity securities. This is the same as the opportunity cost of capital for investing in the firm's assets, and means it is the appropriate discount rate for the firm's average-risk projects.


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    #4
    TiGeR KiNgS
    Registered Users Posts: 1,435 ✭✭✭TiGeR KiNgS


    mari2222 wrote: »
    What a badly written book! you might get some help in the accountancy forum.

    How can you tell the book is badly written from a 3 line quote that is, imo, entirely accurate ?

    Basically, It is the hurdle rate (jargon for required return) that a company needs to make an investment to satisfy its debt and equity responsibilities.

    The WACC is used to calculate the CofC and from what I remember it is put into the NPV calc's to determine the projects acceptability.
    Usually around 10%.

    Its been a while since I did financial management so don't take the above as entirely correct.


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    #5
    mari2222
    Registered Users Posts: 568 ✭✭✭mari2222


    TiGeR KiNgS wrote: »
    How can you tell the book is badly written from a 3 line quote that is, imo, entirely accurate ?

    Basically, It is the hurdle rate (jargon for required return) that a company needs to make an investment to satisfy its debt and equity responsibilities.

    The WACC is used to calculate the CofC and from what I remember it is put into the NPV calc's to determine the projects acceptability.
    Usually around 10%.

    Its been a while since I did financial management so don't take the above as entirely correct.

    The purpose of a text for learners is to explain concepts to them. The book is badly written because it has failed its primary purpose. Often writers resort to jargon and use acronyms without explaining them - this is regarded as bad practice, since it is confusing to learners. Text book writers who "explain" by using jargon are less adept than those who manage to make the complex appear simple.


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