Cost of Capital

Two Sources of Capital Businesses cant mint money. One choice is to sop up money, either from a bank or through a bond sale. Another option is to sell a division of the business through an offering of stock, or lawfulness. Both of these alternatives take after at a be. For debt, the company must make absorb payments. For equity, it may make dividend payments, and shareholders allow for expect capital gains. address of Capital has two components : * approach of Debt * Cost of Equity Cost of Debt The make up of debt is simply the salute of espousal money, or the interest grade that the company would pay on the borrowed amount. When a company is considered risky, its cost of borrowing money rises, and when a company is considered stable, its cost of borrowing money falls. For companies that have issued bonds previously, its possible to estimate the cost of debt by looking at the yield of those bonds. The cost of debt explains the negative chemical reaction that occurs when a companys bonds are downgraded by a ratings confidence such as Standard & Poors. With a lower rating, the company will have to pay high interest to borrow capital, raising its overall cost of capital. Cost of Equity To estimate the cost of equity, consider the point of view of a prospective buyer of the companys shares.

She will expect a return on the stock - from dividends and stock appreciation - and will not buy the shares if she does not believe she will learn that return, and will instead invest elsewhere. This expected return is the cost of equity. To find the cost of equity, begin with the safe rate of return, or the gains that this theoretical investor could get by buying the safest investment around: a 10-year Treasury note. But the company that is issuing equity isnt risk-free - it has risks from its competition, from its industry, from its management team and from many other factors. This factor that the investor will expect a premium above the risk-free rate; this is called the estimated equity... If you want to get a full essay, fix it on our website: Orderessay

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