|Cost of capital|
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Definition of Cost of capital
Cost of capital
The required return for a capital budgeting project.
Cost of capital
The costs incurred by an organization to fund all its investments, comprising the risk-adjusted
cost of capital
Refers to the interest cost of debt capital used by a business
Cost of Capital
The minimum rate of return a company must earn in order to meet
Cost of capital
The blended cost of a companyís currently outstanding debt instruments
Cost of Capital
The discount rate that should be used in the capital budgeting process.
A firm's required payout to the bondholders and to the stockholders expressed as a
Expected return that is foregone by investing in a project rather than in
Expected return on a portfolio of all the firm's securities. Used as a hurdle
See cost of capital.
Weighted means that the proportions of
The weighted average of the costs of the capital components
the weighted average cost of the
the highest rate of return that
a composite of the cost of the various sources of funds that comprise a firmís capital structure; the minimum rate of return that must be earned on new investments so as not to dilute shareholder value
Expected rate of return demanded by investors in a company, determined by the average risk of the companyís assets and operations.
Expected rate of return given up by investing in a project.
Minimum acceptable expected rate of return on a project given its risk.
Expected rate of return on a portfolio of all the firmís securities, adjusted for tax savings due to interest payments.
The 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.
A weighted average of the component costs of debt, preferred shares, and common equity. Also called the composite cost of capital.
Cost of limited partner capital
The discount rate that equates the after-tax inflows with outflows for capital
capitalization of costs
When a cost is recorded originally as an increase
Aggressive Cost Capitalization
cost capitalization that stretches the flexibility within generally
Capitalized Cost An expenditure or accrual that is reported as an asset to be amortized against
Costs Capitalized in Stealth
A particularly egregious form of aggressive cost capitalization
Capital Cost Allowance (CCA)
The annual depreciation expense allowed by the Canadian Income Tax Act.
Undepreciated Capital Costs
The tax definition of the value of an asset that is eligible for tax deprecation.
Placing one or more limits on the amount of new investment undertaken by a firm, either
Government sponsored enterprises
Privately owned, publicly chartered entities, such as the Student Loan
Common stock of a company that has an opportunity to invest money and earn more than the
See: Weighted average cost of capital.
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.
Economic Value Added (EVA)
Operating profit, adjusted to remove distortions caused by certain accounting rules, less a charge
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
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.
discounted cash flow (DCF)
Refers to a capital investment analysis technique
return on assets (ROA)
Although there is no single uniform practice for
Cost of Common Stock
The rate of return required by the investors in the common stock of
Cost of Debt
The cost of debt (bonds, loans, etc.) that a company is charged for
Cost of Preferred Stock
The rate of return required by the investors in the preferred stock of
the rate of return used to discount future cash
economic value added (EVA)
a measure of the extent to which income exceeds the dollar cost of capital; calculated
optimal mix of capital
the combination of capital sources at which the lowest weighted average cost of capital is achieved
The minimum rate of return that a capital purchase proposal must pass
Net present value
A discounted cash flow methodology that uses a required rate of
costs of maintaining current assets, including opportunity cost of capital.
Also called economic value added. Profit minus cost of capital employed.
See weighted-average cost of capital.
Net Present Value (NPV) Method
A 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.
Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.
Agency cost view
The argument that specifies that the various agency costs create a complex environment in
The incremental costs of having an agent make decisions for a principal.
Total costs, explicit and implicit.
Bankruptcy cost view
The argument that expected indirect and direct bankruptcy costs offset the other
Money invested in a firm.
Net result of public and private international investment and lending activities.
decision Allocation of invested funds between risk-free assets versus the risky portfolio.
Capital asset pricing model (CAPM)
An economic theory that describes the relationship between risk and
A firm's set of planned capital expenditures.
The process of choosing the firm's long-term capital assets.
Amount used during a particular period to acquire or improve long-term assets such as
The transfer of capital abroad in response to fears of political risk.
When a stock is sold for a profit, it's the difference between the net sales price of securities and
Capital gains yield
The price change portion of a stock's return.
A lease obligation that has to be capitalized on the balance sheet.
The difference between the net cost of a security and the net sale price, if that security is sold at a loss.
The market for trading long-term debt instruments (those that mature in more than one year).
Capital market efficiency
Reflects the relative amount of wealth wasted in making transactions. An efficient
Capital market imperfections view
The view that issuing debt is generally valuable but that the firm's
Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio.
The makeup of the liabilities and stockholders' equity side of the balance sheet, especially
Amounts of directly contributed equity capital in excess of the par value.
The debt and/or equity mix that fund a firm's assets.
A method of constructing a replicating portfolio in which the manager purchases a
Also called financial leverage ratios, these ratios compare debt to total capitalization
A table showing the capitalization of a firm, which typically includes the amount of
Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures
Interest that is not immediately expensed, but rather is considered as an asset and is then
costs that increase with increases in the level of investment in current assets.
Complete capital market
A market in which there is a distinct marketable security for each and every
Cost company arrangement
Arrangement whereby the shareholders of a project receive output free of
Cost of carry
Related: Net financing cost
Cost of funds
Interest rate associated with borrowing money.
Cost of lease financing
A lease's internal rate of return.
The net present value of an investment divided by the investment's initial cost. Also called
Total par value (number of shares issued, multiplied by the par value of each share). Also
Efficient capital market
A market in which new information is very quickly reflected accurately in share
Equivalent annual cost
The equivalent cost per year of owning an asset over its entire life.
The difference between the execution price of a security and the price that would have
Financial distress costs
Legal and administrative costs of liquidation or reorganization. Also includes
A cost that is fixed in total for a given period of time and for given production levels.
costs, both implied and direct, associated with a transaction. Such costs include time, effort,
Hard capital rationing
capital rationing that under no circumstances can be violated.
The unique capabilities and expertise of individuals.
Incremental costs and benefits
costs and benefits that would occur if a particular course of action were
Transaction costs that include the assessment of the investment merits of a financial asset.
Issued share capital
Total amount of shares that are in issue. Related: outstanding shares.
Value at which a company's shares are recorded in its books.
Indicator of financial leverage. Shows long-term debt as a proportion of the
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