What is the Meaning & Definition of cost of capital
The cost of the capital (or weighted average cost of capital) is the performance required on different types of financing. This cost can be express or implied and expressed as the cost of opportunity for an equivalent investment alternative. The determination of the cost of capital implies the need to estimate the risk of the investment, in assessing the components that conform the capital (such as the issuance of shares or debt). There are several ways to calculate the cost of capital, which depend on the variables used by the analyst.
In other words, the cost of capital would result in compensation that investors will receive following the rise in the company's capital, i.e., the amount that shareholders and creditors will receive. In the case of shareholders, they will receive dividends per share, while creditors will be benefited with interest for the amount disbursed / invests (for example, they invest 10,000 € and receive 12,000, which thus corresponds to an interest of € 2000 following their placement).
The evaluation of the cost of capital provides information about the price that the company pays to use the capital. Said cost is measured as a tax: there is a fee for the cost of debt and another for the cost of equity; two resources are the cost of capital.
We will retain that a company's capital consists of the external accounting capital obtained through the issuance of joint actions in opposition to the acquired quantities, internal accounting capital arising from acquired quantities, preference shares and the cost of debt (before and after tax).
In other words, the cost of capital would result in compensation that investors will receive following the rise in the company's capital, i.e., the amount that shareholders and creditors will receive. In the case of shareholders, they will receive dividends per share, while creditors will be benefited with interest for the amount disbursed / invests (for example, they invest 10,000 € and receive 12,000, which thus corresponds to an interest of € 2000 following their placement).
The evaluation of the cost of capital provides information about the price that the company pays to use the capital. Said cost is measured as a tax: there is a fee for the cost of debt and another for the cost of equity; two resources are the cost of capital.
We will retain that a company's capital consists of the external accounting capital obtained through the issuance of joint actions in opposition to the acquired quantities, internal accounting capital arising from acquired quantities, preference shares and the cost of debt (before and after tax).