Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
![How did you find this amount because thourgh Excel
spreeshit it gives another sum Now, let's address
Rhule's concern about the cost of capital being off 300
basis points (3%): If the cost of capital is off by 300
basis points (10% -3% = 7%), we would recalculate
the NPV using the new discount rate of 7% and check if
the project still yields a positive NPV. NPV (at 7 %) = [(
$6.77 million * ((1 - (1 + 0.07)^(- 10)) / 0.07)] - $16.5
million NPV (at 7%) = [$6.77 million
* (1 - 0.508) / 0.07] - $16.5 million NPV (at 7%) = [$
6.77 million *0.492/0.07] - $16.5 million Explanation:
NPV (at 7%) = $34.6512 million - $16.5 million NPV (
at 7%) = $18.1512 million With a cost of capital of
7%, the NPV of the project is still positive at $18.1512
million. This indicates that even if the cost of capital is
off by 300 basis points (3%), the project remains
financially feasible and attractive.:;](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa463c998-4a80-4c3f-b649-5fb8df6de1e9%2Fcadb1c4d-aaf5-43e3-8fea-158072f6ad48%2F05cscr6_processed.png&w=3840&q=75)
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