Why do why have to assign cost to debt? to retained yield? to common equity? and to preferred equity?
our trainer explained the principle of opportunity cost relating to Cost of Capital but i didn't get it.. please serve!
Thank you so much!
Answers: Every time you invest in a project, you are borrowing money to use as funds. The costs associated with this borrowing are term as costs of debt, retained earnings, and preferred equity depending on the method you choose to help yourself to to raise the required assets.
The concept of opportunity cost is that all the money you use to fund a project could gain you a return somewhere else. The only justification you would invest in a project is because it would offer you the highest possible return for that investment. The second best alternative for investing that amount is the opportunity cost of that investment. You can also regard as of it as the best alternative foregone because of this investment that you made.
For example, a company can invest in purchasing a clean building for operations which will increase the number of unit it produces. This would be the investment. The alternative is that it lets the money sit within a bank side, which would earn interest. The opportunity cost here is the amount of interest you could have earn had you not invested surrounded by the building.
Most large companies use multiple sources of financing (debt, equity, preferred shares). The network cost of borrowing in the weighted average cost after factoring adjectives the sources of financing, also known as Weighted Average Cost of Capital (WACC).
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our trainer explained the principle of opportunity cost relating to Cost of Capital but i didn't get it.. please serve!
Thank you so much!
Answers: Every time you invest in a project, you are borrowing money to use as funds. The costs associated with this borrowing are term as costs of debt, retained earnings, and preferred equity depending on the method you choose to help yourself to to raise the required assets.
The concept of opportunity cost is that all the money you use to fund a project could gain you a return somewhere else. The only justification you would invest in a project is because it would offer you the highest possible return for that investment. The second best alternative for investing that amount is the opportunity cost of that investment. You can also regard as of it as the best alternative foregone because of this investment that you made.
For example, a company can invest in purchasing a clean building for operations which will increase the number of unit it produces. This would be the investment. The alternative is that it lets the money sit within a bank side, which would earn interest. The opportunity cost here is the amount of interest you could have earn had you not invested surrounded by the building.
Most large companies use multiple sources of financing (debt, equity, preferred shares). The network cost of borrowing in the weighted average cost after factoring adjectives the sources of financing, also known as Weighted Average Cost of Capital (WACC).
Resolved Questions: