Wise company management will only invest in initiatives and projects that will provide returns that exceed the cost of capital. Cost of capital, from the perspective on an investor, is the return expected by whomever is providing the capital for a business. In order words, it is an assessment of the risk of a company's equity.
Concise interview answer to what the difference of cost of capital vs WACC? What is the Cost of Capital vs. When talking about discount rates, the term "cost of capital" and "WACC" are sometimes used interchangeably - but it is important to draw a distinction between the two.
Put simply, the cost of capital is a generic term for the cost of obtaining capital to run a business. WACC represents the cost that a company incurs to obtain capital that can be used to fund operations, investments, etc.
The Weighted Average Cost of Capital includes the cost of equity financing issuing shares to investorsdebt financing issuing debt to debt investors. Now we bring them all together to find WACC. The cost of debt looks at the amount of debt in the capital structure and then multiplies that by the weighted average interest rate.
This is done to reflect the interest rates of the company's debt - which is the cost of having debt investors. Then you multiply by 1 - tax rate since interest payments are tax deductible. Since interest payments are paid before paying taxes - by increasing the amount of interest payments you end up paying less taxes then you previously did.
This is the cost associate with selling part of a company to investors.
The equation can be seen below. The WSO investment banking interview course is designed by countless professionals with real world experience, tailored to people aspiring to break into the industry. This guide will help you learn how to answer these questions and many, many more.
Log in or register to post comments 0Helpful.It has been my experience that minimizing income taxes is typically the number one objective for many of my clients.
Yet, some clients instruct me to not claim depreciation (the technically correct term for income tax purposes is capital cost allowance or “CCA”) on their rental property(ies), which results in a higher income tax liability.
Cost Accounting - 61 Cost Accounting interview questions and answers by expert members with experience in Cost Accounting subject.
Discuss each question in detail for better understanding and in-depth knowledge of Cost Accounting. Calculating the Cost of Capital: Exam Practice – Question Share | Tweet CC’s cost of ordinary equity, using the dividend valuation model. CC’s weighted average cost of capital (WACC).
(7 marks) Next step: Attempt the question yourself. Review my walkthrough of the answer.
The Canada Revenue Agency (CRA) requires, in most cases, that taxes be paid on capital gains for all property including investments such as stocks, bonds, mutual funds, and exchange-traded funds.
Harcourt, Inc. items and derived items copyright © by Harcourt, Inc. Answers and Solutions: 1 Chapter 11 The Cost of Capital ANSWERS TO SELECTED END-OF. Cost of capital is the required return necessary to make a capital budgeting project, such as building a new factory, worthwhile. Cost of capital includes the cost of debt and the cost of equity.