Talk:Cost of capital

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CoC not the same for new projects still on the drawing boards[edit]

Opening says cost of capital is: "'the required rate of return on a portfolio company's existing securities'. It is used to evaluate new projects of a company." How can this be? A new project has its own cost of capital that is dependent on its own risks. A company will have a cost of capital, the divisions within it will have their costs of capital, existing, functioning operations/projects have a cost of capital and all new projects each have their own costs of capital.

So it is incorrect to state that there is one cost of capital that rules everything, whether it is an old steady operation of a SpaceX rocket system still being developed. Tom Schmal (talk) 23:28, 30 December 2015 (UTC)




I don't know if it's bad english or a bunch of baloney, look at the history of this page, the meaning of the article is unrecognizable at times.--Jerryseinfeld 03:58, 9 Jan 2005 (UTC)

Discounted at tax rate[edit]

As it is mentioned in the article that Thus, for profitable firms, debt is discounted by the tax rate. The formula can be written as (Rf + credit risk rate)(1-T) what means by discounting here can anyone explain? —Preceding unsigned comment added by Bhoola Pakistani (talkcontribs) 09:37, 30 January 2010 (UTC)

Retained earnings[edit]

Note that retained earnings is also charged at the cost of equity, since if the money is not reinvested it will normally be returned to shareholders. Investors expect retained earnings to earn the same return as money initially invested.

Can someone explain this? It's "charged" at the cost of equity? Does it mean that the cost of retained earnings is the same as the cost of equity?--Jerryseinfeld 04:17, 9 Jan 2005 (UTC)
I rewrote it like this:--Jerryseinfeld 04:57, 9 Jan 2005 (UTC)
"Note that the cost of retained earnings is also estimated like this, since investors expect retained earnings to earn the same return as dividends reinvested in the firm."
Wouldn't it be easier to drop this? It is, in fact, a truism: retained earnings are part of equity, so by definition the statement is true.--Gregalton 22:07, 19 November 2006 (UTC)
but there is a little difference in cost of equity and cost of retained earning that is of flotation cost as there flotation cost is related with equity nor with retained earnings Cost of capital -- Bhoola Pakistani —Preceding undated comment added 09:32, 30 January 2010 (UTC).

Risk premium[edit]

This value of the risk premium parameter varies over time and place, but over many countries during the twentieth century it has averaged around 8%

This is absolutely wrong. The annual return of the 30 Dow Industrials including dividends have been 7% 1905-2005. While the return on bonds with similar duration, say one year treasury bonds, have been, what? 3%? So the risk premium is not a penny more than 3-4%.--Jerryseinfeld 04:15, 9 Jan 2005 (UTC)

Ex ante[edit]

This is so incredibly stupid:

"the value cannot be known "ex ante" (beforehand), but can be estimated from "ex post" (past) returns and past experience with similar firms."

Oh, really? I thought you COULD know the future with certainty.--Jerryseinfeld 04:53, 9 Jan 2005 (UTC)


"The computation of the cost of equity for a public company is computed assuming that equity investors are diversified"

Do you understand what you're saying? Of course it's about a diversifed portfolio, it's about AVERAGES, AVERAGE risk and AVERAGE return, do you understand?--Jerryseinfeld 05:06, 9 Jan 2005 (UTC)

Merging with Expected Rate of Return[edit]

I don't think that it's appropriate to merge this article with the "expected rate of return" article. The one, rate of return, is related to investment/asset pricing theory and the other, cost of capital, is related to capital structure and financing. They're separate tools used for separate purposes. In fact, capital structure is a tool used internally by the corporation's management while asset pricing models are used by external investors and analysts. Ultimately, the capital structure does have an impact upon the price of the firm's stock in the marketplace but that's only a part of the application of expected rate of return. Vraguso 17:07, 19 February 2007 (UTC)

Significant edit in march 2007[edit]

Moved to bottom of page as is traditional.--Gregalton 13:56, 1 April 2007 (UTC)

I guess the entire article needs a revision. It mixes several topics alltogether: how cost of capital is defined, how it is evaluated and empirically estimated, what the relation is between different forms of cost of capital (in particular: cost of equity, cost of debt) and what role taxes play. This should be done with care and not by throwing examples, numbers and formulas to the reader. Furthermore, you need to cite some literature that is newer than MoMi. .. User:Al64 1 Apr 2007.

Is debt really cheaper than equity[edit]

Merton Miller didn't think so when he wrote "Debt & Taxes". And the page's current contention that only profitable firms benefit from the tax shield ignores NOL carryforwards. In all, it's a pretty poorly-written article.

Expected return v. Required return[edit]

It has been a while since I studied these things, therefore I would like to check with you before making a change. I believe the first sentence should say "The cost of capital is a required return..." instead of "The cost of capital is an expected return...", because the cost of raising capital for a company is the same thing as a return at which investors are willing to provide the company with capital, i.e. their required return. Also, it makes little sense to compare cost of capital and expected return ("For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.") if we declare them equal in the first place. --Undine (talk) 21:09, 27 August 2008 (UTC)

working out the IRR[edit]

Should show working out the Internal rate of return

Opportunity cost of capital vs cost of funding[edit]

This concept should be explained here as well