Cost of Capital Homework Answers
The cost of capital can be defined as the opportunity price of investing in a new project. In simple terms, cost of capital can be seen as the percentage of return that a person would expect if he or she had invested the same amount of money in another business venture with the same degree of investment risks.
From an investorâ€™s point of view, it can be seen as the rate of return that would persuade a particular investor to pump his or her money in a particular project. This is the most extent that the cost of capital homework answers is ready to stretch.
The basic understanding of the cost of capital is simple, but it can be defined variedly when it comes to an investor and when it comes to a company looking for investments. From a companyâ€™s point of view, cost of capital is the rate of return it needs to provide a would-be investor to draw him or her towards investing in that particular companyâ€™s new project instead of its rivalsâ€™ or its own existing projects that have the same level of risks.
Example of cost of capital
Let us look at an example describing the cost of capital and its application.
Let us assume a company, say A, has around $100 million for investment. The mentioned company has two possible scenarios where it can invest that amount. In one possible case, the company A considers investing the mentioned money in buying bonds and shares for a period of say 10 years. These investments have some risks associated with them.
Another possible scenario has A investing the same amount of money in renovating its infrastructure. Many online websites have separate platforms dedicated solely to cost of capital homework answers which are an indication of the importance of this particular topic to not just prospective investors but also to a normal graduation student.
The proposed renovation aims to save around $100 million over a period of 10 years. The expected rate of return from the first possibility is around 12% per year while from the second possibility is 10%. As one can see, it makes more sense for company A to invest the amount in the first case, that is, in buying shares and bonds than using it to renovate its infrastructure.
For commerce students looking for making their mark as a smart and intelligent investor, cost of capital is an important topic to grasp. It is quintessential for any investor or investment adviser. Numerous online platforms offer classes on the cost of capital along with the related cost of capital homework answers.
Factors affecting cost of capital:
The cost of capital is influenced by factors that are diverse in nature. Some of the factors are controllable whereas the others are uncontrollable, that is, the company has no hand in these factors and hence are often apprehensive about them.
The controllable factors are:
- The dividend policy of the company.
- The investment policy of the company.
- The structure of the company and its economic policy.
The uncontrollable factors include:
- The government and central bank regulated interest rates. Though they may remain constant for one year to another, however in cases of emergency, recession or inflation, these interest rates are highly regulated and can be fixed as well. If they are done so, then the cost of capital to is affected for obvious reasons.
- Students generally have a hard time understanding these changing government policies and are often seen taking the help of the internet while looking for their cost of capital homework answers to their given assignments.
- The tax rates fixed by the government. The tax rates generally are very dynamic and keep on changing with each finance budget.
If one tries delving deep into the subject matter, then we come across these factors. Though at first these factors may seem easy, it requires the understanding of mathematics and a proper acumen to judge the economic scenarios of the future. Business schools and colleges generally give their students assignments bordering on real-life scenarios.
More often than not, such students require expert advice on such scenarios, and this is where online portals offering cost of capital homework answers come into the picture. It has been seen that such portals are not only visited by students but also professionals who seek advice by means of formatting their queries in the form of assignments.
Importance of cost of capital
- The primary objective of any business and investor is the same-they primarily are concerned with making money. By making money, what I am trying to stress is that the money that the business or the investor earns has to be more than the money he or she invested.
- Cost of capital quite justifiably is a benchmark when it comes to evaluating a company. When business valuations of multi-billion dollar companies or even a small company are done, cost of capital is observed and compared in order to have a clear view of the companyâ€™s economic return prowess.
- A smart investor will always look at the cost of capital of a company before he or she ultimately decides to invest in it. However, cost of capital should not be the sole concerning factor while deciding an investment because cost of capital can be a bit misleading too. Cost of capital doesnâ€™t necessarily equate the source of funds of a company, but instead it evaluates how the funds are being used.
Homeworking websites to the rescue:
It is important for students to remember the above-mentioned points while giving their cost of capital homework answers because as has been mentioned before, it is important to keep in mind that cost of capital sees how and where money is being spent by a company instead of how it has been raised.
Hence it will always be a mistake if students calculate interests on the money borrowed by a company as its cost of capital because thatâ€™s not how cost of capital works. Moreover, companies have a tendency of borrowing money from investment powerhouses and banks for financing their new and upcoming projects.