COST OF CAPITAL

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:32AM in AAT student discussion
Hi

am having some difficulty in understanding the concept of cost of capital? can someone please provide me a simple explanation of this, is the cost of capital , the cost of the finance of the project.is this the same as rate of return? additonallt, can someone please provide me a simple explantion of the internal rate of return.?


thank-you zoe

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:COST OF CAPITAL

    I've learnt that the Internal Rate of Return is the discount or interest rate that will bring the NPV of a set of cashflows to zero. Just memorize that like I have and you'll be fine!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:COST OF CAPITAL

    thank-you for that, is the cost of capital the cost of financing the project? what is the rate of return, is this the rate that the company wants back on the investment?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:COST OF CAPITAL

    :shock: I dunno
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:COST OF CAPITAL

    It says here (Osborne)

    "Cost of capital - the percentage cost of financing an investment - either the rate of return that a business expects on its money or the rate of interest it has to pay when borrowing"

    Chris
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:COST OF CAPITAL

    Aye so usually its calculated as a "weighted average" of the debt and the share capital.

    Its the return required for those that are financing the business.

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