Try from the Cost of Equity to the Cost of Capital Homework Help to Understand
Failing to understand the difference between cost of equity and cost of capital? While they might seem to be quite similar, however they are variedly different in corporate finance. Cost of equity falls under cost of capital and is an integral part for an investor to understand before they invest. Thus, it is alright to be a bit confused about the two and get it mixed up.
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What is cost of equity?
The cost of equity is the required rate of return that the investors seek to invest in a company. It is the risk of ownership that the investors demand in exchange of purchasing the assets of a company. The cost of equity is calculated through two different models: dividend discount and CAPM.
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Understanding cost of capital:
Cost of capital is defined as the cost of funds that are used in order to gather capital and finance a business. It is dependent on the type of financing used- cost of equity if equity is used to finance the business, and cost of debt when it is financed through debt. However, many companies use a combination of these two to finance their companies and the cost of capital for such cases is known as weighted average cost of capital.
The difference between cost of capital and cost of equity
From the cost of equity to the cost of capital assignment help can best assist you to understand the difference between the two. While the cost of equity is the return percentage that is expected by the investors, cost of capital is the rate of return demanded by its lenders and owners.
Cost of capital ignores the risks and the impact on the equity, whereas cost of equity is greatly concerned by the risks of investments. The cost of equity comes from the investor’s point of view, while the cost of capital from the company’s point of view.
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