Chapter 11, Problem 3DQ

Summary Introduction

To explain:  Whether the historical costs of existing debt and equity are used or the current assets are in computing the cost of capital, and the reason for the same.

Introduction:

Cost of capital:

It is defined as the return required to be earned by the investment or project. It includes the costs of equity and debt.

Historical costs:

It is the cost used as a measure of the value at which assets are recorded at the original cost of their acquirement.