Describe the method of determining the Company Cost of Capital?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Describe the method of determining the Company Cost of Capital?

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Step 1

Firms often operate their company using the capital generated from different sources. That involves raising capital by selling their securities on the stock exchange (equity), or issuing interest-bearing bonds or taking out commercial credits (debt).

Step 2

Each of these capital comes at a cost, and the cost of each form varies from source to source. The weighted average cost of capital is determined by multiplying the expense or cost of each type of capital (debt and equity) by its related weight and then summing together the items to determine the value.

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