Cost of capital: Difference between revisions
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''Investment - rate of return.'' | |||
Broadly, the rate of return on a firm’s investments which is required to service the providers of the firm’s capital. | Broadly, the rate of return on a firm’s investments which is required to service the providers of the firm’s capital. | ||
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The concept of cost of capital is important because when inferior rates of return are earned from operational investments - for example only 5% compared with a cost of capital of 8% - such operations are destructive of shareholder value and need to be improved or discontinued | The concept of cost of capital is important because when inferior rates of return are earned from operational investments - for example only 5% compared with a cost of capital of 8% - such operations are destructive of shareholder value and need to be improved or discontinued. | ||
The results of these operations may appear (wrongly) to be profitable, when considered in simplistic historical cost financial accounting terms. | |||
== See also == | == See also == | ||
* [[Capital]] | |||
* [[Capital structure]] | |||
* [[Discount rate]] | * [[Discount rate]] | ||
* [[Discounted cash flow]] | |||
* [[Gearing]] | |||
* [[Opportunity cost]] | * [[Opportunity cost]] | ||
* [[Opportunity cost of capital]] | * [[Opportunity cost of capital]] | ||
* [[Rate of return]] | |||
* [[Risk]] | |||
* [[Shareholder value]] | * [[Shareholder value]] | ||
* [[Tax shield]] | * [[Tax shield]] | ||
* [[Weighted average cost of capital]] | * [[Weighted average cost of capital]] | ||
== Other resource== | |||
[[Media:2015_11_Nov_-_Balancing_act.pdf| Balancing act, The Treasurer, 2015]] | |||
[[Category:Accounting,_tax_and_regulation]] | |||
[[Category:The_business_context]] | |||
Latest revision as of 02:22, 6 January 2024
Investment - rate of return.
Broadly, the rate of return on a firm’s investments which is required to service the providers of the firm’s capital.
Often the term is used in a more specific sense to refer to the weighted average cost of capital of a business.
For example if a firm's cost of capital is 8%, it must earn a return of at least 8% on its operational investments in order to provide the investors with the minimum investment return of 8% which they require.
The concept of cost of capital is important because when inferior rates of return are earned from operational investments - for example only 5% compared with a cost of capital of 8% - such operations are destructive of shareholder value and need to be improved or discontinued.
The results of these operations may appear (wrongly) to be profitable, when considered in simplistic historical cost financial accounting terms.
See also
- Capital
- Capital structure
- Discount rate
- Discounted cash flow
- Gearing
- Opportunity cost
- Opportunity cost of capital
- Rate of return
- Risk
- Shareholder value
- Tax shield
- Weighted average cost of capital
