Home Solutions The importance of understanding the cost of capital to a business
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Think about the importance of understanding the cost of capital to a business. Comment on why it is important, and explain why as debt increases (in capital structure), eventually the WACC will increase (despite the fact debt is usually the lower cost component cost of capital). How does your current or past company, or one you know of, decide on its cost of capital? Finally, What assignments/assessments from this course aligned with your profession? How can the lessons you have learned positively affect your career success (now or in the future)? (125 Words)
Cost of the capital is the rate of return which is minimum which has to be earned on investments in order to satisfy the investors of various types who are making investments in the company in the form of shares, debentures and loans. It is used in financial investment which refers to the cost of a company’s funds or the shareholders return on the company’s existing deals. It is the required rate that a company must achieve to cover the cost of generating funds in the market. By seeing this only the investor invests the money in the company if the company is giving the required rate of return. It is a guideline to measure the profitability of different investments. The importance of cost of capital is that it is used to evaluate new project of company and allows the calculations to be easy so that…..