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Financial Terms | |
cost of capital |
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Definition of cost of capitalcost of capitalRefers to the interest cost of debt capital used by a business Cost of capitalThe blended cost of a company’s currently outstanding debt instruments Cost of capitalThe costs incurred by an organization to fund all its investments, comprising the risk-adjusted Cost of CapitalThe discount rate that should be used in the capital budgeting process. Cost of CapitalThe minimum rate of return a company must earn in order to meet Cost of capitalThe required return for a capital budgeting project.
Related Terms:Average cost of capitalA firm's required payout to the bondholders and to the stockholders expressed as a company cost of capitalExpected rate of return demanded by investors in a company, determined by the average risk of the company’s assets and operations. ![]() cost of capital (COC)the weighted average cost of the Opportunity cost of capitalExpected return that is foregone by investing in a project rather than in opportunity cost of capitalthe highest rate of return that opportunity cost of capitalExpected rate of return given up by investing in a project. project cost of capitalMinimum acceptable expected rate of return on a project given its risk. User Cost of CapitalThe implicit annual cost of investing in physical capital, determined by things such as the interest rate, the rate of depreciation of the asset, and tax regulations. What would be paid to rent this capital if a rental market existed for it. Weighted average cost of capitalExpected return on a portfolio of all the firm's securities. Used as a hurdle Weighted average cost of capitalSee cost of capital. weighted-average cost of capitalWeighted means that the proportions of ![]() weighted average cost of capitala composite of the cost of the various sources of funds that comprise a firm’s capital structure; the minimum rate of return that must be earned on new investments so as not to dilute shareholder value Weighted Average Cost of Capital (WACC)The weighted average of the costs of the capital components weighted-average cost of capital (WACC)Expected rate of return on a portfolio of all the firm’s securities, adjusted for tax savings due to interest payments. Weighted Average Cost of Capital (WACC)A weighted average of the component costs of debt, preferred shares, and common equity. Also called the composite cost of capital. Aggressive Cost Capitalizationcost capitalization that stretches the flexibility within generally Capital Cost Allowance (CCA)The annual depreciation expense allowed by the Canadian Income Tax Act. capitalization of costsWhen a cost is recorded originally as an increase Capitalized Cost An expenditure or accrual that is reported as an asset to be amortized againstfuture-period revenue. Cost of limited partner capitalThe discount rate that equates the after-tax inflows with outflows for capital Costs Capitalized in StealthA particularly egregious form of aggressive cost capitalization Undepreciated Capital CostsThe tax definition of the value of an asset that is eligible for tax deprecation. Capital rationingPlacing one or more limits on the amount of new investment undertaken by a firm, either carrying costscosts of maintaining current assets, including opportunity cost of capital. Cost of Common StockThe rate of return required by the investors in the common stock of Cost of DebtThe cost of debt (bonds, loans, etc.) that a company is charged for Cost of Preferred StockThe rate of return required by the investors in the preferred stock of discount ratethe rate of return used to discount future cash Discounted cash flow (DCF)A method of investment appraisal that discounts future cash flows to present value using a discount rate, which is the risk-adjusted cost of capital. discounted cash flow (DCF)Refers to a capital investment analysis technique Economic Value Added (EVA)Operating profit, adjusted to remove distortions caused by certain accounting rules, less a charge economic value added (EVA)a measure of the extent to which income exceeds the dollar cost of capital; calculated Government sponsored enterprisesPrivately owned, publicly chartered entities, such as the Student Loan Growth stockCommon stock of a company that has an opportunity to invest money and earn more than the Hurdle rateThe minimum rate of return that a capital purchase proposal must pass Internal rate of return (IRR)A discounted cash flow technique used for investment appraisal that calculates the effective cost of capital that produces a net present value of zero from a series of future cash flows and an Net present valueA discounted cash flow methodology that uses a required rate of Net Present Value (NPV) MethodA method of ranking investment proposals. NPV is equal to the present value of the future returns, discounted at the marginal cost of capital, minus the present value of the cost of the investment. optimal mix of capitalthe combination of capital sources at which the lowest weighted average cost of capital is achieved residual incomeAlso called economic value added. Profit minus cost of capital employed. Residual income (RI)The profit remaining after deducting from profit a notional cost of capital on the investment in a business or division of a business. return on assets (ROA)Although there is no single uniform practice for WACCSee: Weighted average cost of capital. WACCSee weighted-average cost of capital. "Soft" Capital Rationingcapital rationing that under certain circumstances can be violated or even viewed Absorption costingA method of costing in which all fixed and variable production costs are charged to products or services using an allocation base. absorption costinga cost accumulation and reporting Absorption costingA methodology under which all manufacturing costs are assigned Accelerated cost recovery system (ACRS)Schedule of depreciation rates allowed for tax purposes. Activity-based costingA method of costing that uses cost pools to accumulate the cost of significant business activities and then assigns the costs from the cost pools to products or services based on cost drivers. activity based costing (ABC)A relatively new method advocated for the activity-based costing (ABC)a process using multiple cost drivers to predict and allocate costs to products and services; Activity-based costing (ABC)A cost allocation system that compiles costs and assigns Actual costThe actual expenditure made to acquire an asset, which includes the supplierinvoiced actual cost systema valuation method that uses actual direct Additional paid-in capitalAmounts in excess of the par value or stated value that have been paid by the public to acquire stock in the company; synonymous with capital in excess of par. Additional paid-in capitalAny payment received from investors for stock that exceeds additional paid-in capitalDifference between issue price and par value of stock. Also called capital surplus. Agency cost viewThe argument that specifies that the various agency costs create a complex environment in Agency costsThe incremental costs of having an agent make decisions for a principal. Aggressive Capitalization Policiescapitalizing and reporting as assets significant portions of All-in costTotal costs, explicit and implicit. Amortized Costcost of a security adjusted for the amortization of any purchase premium or appraisal costa quality control cost incurred for monitoring attribute-based costing (ABC II)an extension of activitybased costing using cost-benefit analysis (based on increased customer utility) to choose the product attribute authorized share capitalMaximum number of shares that the company is permitted to issue, as specified in the firm’s articles of incorporation. Average-Cost Inventory MethodThe inventory cost-flow assumption that assigns the average Avoidable costscosts that are identifiable with and able to be influenced by decisions made at the business backflush costinga streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires Bankruptcy cost viewThe argument that expected indirect and direct bankruptcy costs offset the other Batch costA cost that is incurred when a group of products or services are produced, batch-level costa cost that is caused by a group of things budgeted costa planned expenditure CapitalMoney invested in a firm. CAPITALThe money, raised by selling stock or bonds or taking out loans, that you use to start, operate, and grow a business. CapitalThe shareholders’ investment in the business; the difference between the assets and liabilities capitalA very broad term rooted in economic theory and referring to CapitalThe investment by a company’s owners in a business, plus the impact of any Capitala) Physical capital: buildings, equipment, and any materials used to produce other goods and services in the future rather than being consumed today. CapitalExpenditures Purchases of productive long-lived assets, in particular, items of property, CapitalAny asset or stock of assets, financial or physical, capable of producing income. Capital accountNet result of public and private international investment and lending activities. Capital AccountThat part of the balance of payments accounts that records demands for and supplies of a currency arising from purchases or sales of assets. Capital allocationdecision Allocation of invested funds between risk-free assets versus the risky portfolio. capital assetan asset used to generate revenues or cost savings Capital assetA fixed asset, something that is expected to have long-term usage within Capital asset pricing model (CAPM)An economic theory that describes the relationship between risk and Capital Asset Pricing Model (CAPM)A model for estimating equilibrium rates of return and values of capital asset pricing model (CAPM)Theory of the relationship between risk and return which states that the expected risk Capital budgetA firm's set of planned capital expenditures. capital budgetmanagement’s plan for investments in longterm capital budgetList of planned investment projects. Capital budgetingThe process of choosing the firm's long-term capital assets. capital budgetingRefers generally to analysis procedures for ranking Related to : financial, finance, business, accounting, payroll, inventory, investment, money, inventory control, stock trading, financial advisor, tax advisor, credit. |