What is the cost of capital and why is it important?
What is the cost of capital and why is it important? What is meant by the term “weighted average cost of capital?”
Cost of Capital is the minimum rate of return that a company must earn in order to fulfill the expectations of its investors. Or it is an opportunity cost of making a specific investment. Or it is a rate of return required to persuade the investor to make a given investment.
Cost of capital plays a vital role in decision-making process of financial management.
The financial leverage, dividend decisions, financial decisions, capital structure, working
capital management are greatly influenced by cost of capital.
Weighted Average Cost of Capital is a firm’s blended cost of capital across all sources
including equity shares, preferred shares and debt. Costs are weighted by their
percentage of total capital and are added together.
2. What were the yields on the two representative outstanding Heinz-debt issues as of the end of
April 2010? What were they one year earlier?
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