The Cost of Capital - Essay Example

Only on StudentShare

Extract of sample
The Cost of Capital

Richard Brealey (2001) mentions cost of capital represents the interest paid for the borrowed funds. Cost of capital can also include focusing on Capital Asset Pricing Model (Sheridian, Martin & Keown, 2010). The formula determines the appropriate expected return of alternative projects. The cost of capital is the amount that the investor has to pay in order to generate a series of future dividend incomes, return of investments (Sheridian, Martin & Keown, 2010). For example, Geoff Black (2010) reiterated the business earns $1,000,000 in one year. The profits will grow by 2 percent per year, and the company generates a net worth of $16,666,667 after two years. The cost of capital is arrived at as follows: $1,000,000 /(X- 2%) = $16,666,667. X represents the cost of capital. After computing the formula, X is equal to 8 percent cost of capital figure. Further, the cost of capital can include the return that the stock market investors are expected to earn from their investments in a company. The firm that generates revenues more than the amount of cost of capital will entice the company’s current and prospective investors to invest additional funds into the invested company’s coffers. For example, Microsoft generated a 53 percent return on its equity. The company’s equity is $7.2 billion. Computing, the company’s return on equity is $3.8 Billion. ...
Download paper


The cost of capital Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts 14 March 2012 Businesses can generate cash inflows from loans. The research focuses on the reasons for paying the cost of capital. The research includes different cost of capital sources…
Author : kuvalisjules

Related Essays

The weighted average cost of capital of the company. Vagabond plc.
Increasing level of debts increases the financial risk of a company which eventually increases the cost of equity as well. The weighted average cost of capital of highly geared company is higher as compared to the others.
14 pages (3514 words) Coursework
Petrobras and cost of capital
Petrobras was operating in a higher risk environment due to Brazil’s economic turbulence. The cost of debt for any given company is the cost of raising extra revenue by issuing the debt. Likewise, the cost of equity refers to that extra revenue associated with issue of the equity shares.
12 pages (3012 words) Essay
The cost of equity capital and the CAPM
The three most popular methods include: dividend growth model, capital asset pricing model and the arbitrage pricing model. Dividend growth model Organizations utilize the cash generated for two purposes: they either reinvest it in the growth or new projects of the organization or pay some amount as dividend to the common stockholder. The Dividend growth model is based on this premises that a shareholder of the organization will want both dividend as well as capital appreciation while holding the stock. The cost of equity in this case can be given as (Weaver and Weston, 2004, pg.282): Where, R...
4 pages (1004 words) Essay
The Capital Structure Decision and the Cost of Capital
The products include dolls and accessories, vehicles, games, puzzles, as well as play sets. The company’s popular toy brands include the Barbie dolls, Polly Pocket, Little Mommy, Monster High, BabyGear, WWW Wrestling figures, Fisher-Price, CARS, Toy Story, Max Steel, and Batman. The company sells it toy products in physical stores as well as online stores. Based on the module discussions discussed, the nature of the Mattel (http:/ company’s toy business operations and its toy clients, it is highly recommended that the capital structure...
4 pages (1004 words) Essay
Capital Structure Decision and the Cost of Capital
About These Firms Headquartered in California USA, eBay Inc. is an online auction website that was started in September 2005. You can buy almost anything on eBay, but it has to be legally admissible and not dangerous or restricted items. People bidding for items on eBay can use auction price listings, fixed price format or fixed price format with best offer. Presently eBay operates in around 30 countries. When it went public in September 2008, the price went up to $53.50 from $18.00 on the opening day of the IPO offer. As of 14 February 2012, the stock price of the eBay company (EBAY) was...
5 pages (1255 words) Essay
Cost of Capital
Cost of capital is the minimum returns that a company can give shareholders on their investments and accordingly the company has to earn the minimum returns. If merging happens between one company that has high cash flows and another company that has low internally generated cash flows, then such merger can reduce the cost of capital. Introduction In today’s economic world, mergers and acquisitions (M & A) have become common strategy for growth and diversification of companies. During the 1990s, M & A activities broke all previous records both in terms of the number of such transactions and...
38 pages (9538 words) Dissertation
Optimal Capital structure problems
There is certainty of getting off these ranges. The cost of capital will rise when it is off the range; this is illustrated by a blue line. The overall cost of capital for All Seasons is the cost of equity and the weighted Average. For instance “All season” market value debt is 420 dollars, Market Value Equity is 180 dollars, the cost of debt is 14%, and equity beta is 1.36, while the marginal tax rate is 20%. Taking the company from its inception, “All Season” was financed through equity; therefore, its average cost of capital was similar to the cost of equity. When the company grew,...
3 pages (753 words) Coursework
Got a tricky question? Receive an answer from students like you! Try us!