Cost of Capital COC
Evidence shows that Weighted Average Cost of Capital (WACC) approach is used in investment appraisal by 53% of UK listed companies. They also found that nearly 80% of business reviews their cost of capital frequently. This evidences were found in one of the articles written by Petty and Scott,1981; Corr, 1985; Arnold and Hatzopoulos,2000.
What is Cost of Capital?
Factors of production and related costs are
• Land - Rent
• Labour - Wages
• Capital - Interest
• Entrepreneurship - Dividend
Capital is a necessary factor for a business. The company needs money for the different needs for example diversification of their business, start new projects, etc. The overall aim is to increase the wealth of the shareholders’ funds.
Cost of capital of an individual’s is equal to the cost of capital for the company that borrows from that individual. For example if company X borrows money from an individual for an interest rate of 10% per annum, this will be the cost of capital for both individual and the company. The cost of capital rate always considers the time value of money and the risk. Therefore this method is quite famous in decision making.
Equation for Cost of Equity
The cost of equity capital, unlike the cost of debt, cannot be estimated from the accounting records on an actual or embedded approach. An analyst must look to the market to obtain the cost since there is no contractual annual rate of dividend for common stock similar to that of senior capital.
LAND ECONOMICS 1973
Required rate of return for equity capital under conditions of growth and consideration of regulatory lag
By:-
Howard E. Thompson
Lionel W. Thatcher
Equatio ...