Cost of capital The cost of borrowing money from all sources, namely, loans, bonds, and preferred and common stock. It is expressed as an interest rate. [Pg.54]

If the cost of capital is used as the interest rate (see Section 6.6.4), then the annual capital charge ratio can be used to convert the initial capital expense into an annual capital charge, or annualized capital cost, as described in Section 6.2.5. [Pg.369]

The cost of capital may also be considered as the interest rate at which money can be invested instead of putting it at risk in a manufacturing process. Let us consider the process data listed in Table 9-4 and plotted in Fig. 9-10. If the cost oi capital is 10 percent, then the appropriate discounted-cash-flow curve in Fig. 9-10 is abcdef. Up to point e, or 8.49 years, the capital is at risk. Point e is the discounted breakeven point (DEEP). At this point, the manufacturing process [Pg.812]

The overall cost of capital sets the interest rate that is used in economic evaluation of projects. The total portfolio of projects funded by a company must meet or exceed this interest rate if the company is to achieve its targeted return on equity and hence satisfy the expectations of its owners. [Pg.363]

Various i Interest rate per period, usually annual, often tbe cost of capital Dimensionless [Pg.801]

The effect of high income-tax rates on the cost of capital is very important. In determining income taxes, interest on loans and bonds can be considered as a cost, while the return on both preferred and common stock cannot be included as a cost. Since corporate income taxes can amount to more than half of the gross earnings, the source of new capital may have a considerable influence on the net profits. [Pg.248]

Interest charges are not included for the fixed capital (since we will calculate an annualized charge based on overall cost of capital later). An interest charge is included for the working capital, as working capital is recovered at the end of the project and so should not be amortized, as discussed in Section 6.7.6. [Pg.375]

The minimum acceptable rate of return (MARK) for a venture depends on a number of factors such as interest rate, cost of capital, availability of capital, degree of risk, economic project life, and other competing projects. Management will a(bust the MARK depending on any of the above factors to screen out the more attractive ventures. When a company invests in a venture, the investment must earn more than the cost of capital and should be able to pay dividends. [Pg.30]

We notice in particular that inflation does not affect quoted interest rates when assessing present values of cost of capital. It must, however, be taken into account in assessing the interest rate on the dividend which will be expected by investors. [Pg.846]

The most important assessment is the comparison with the company s present level of cost of capital, as measured by the CAPM for a single source, or the WACC for capital derived from several sources. As interest rates have fallen quite considerably, it is likely that these models, being historical, are higher than would be the case for capital raised now. However, to set either of these as the target rate would probably be safe, were it not for the risks involved in any new project. [Pg.289]

The cost of the company s own funds can thus be calculated, by means of the CAPM. However, it is an unusual company that does not have other sources of finance, each with its own cost (i.e. interest rates for different loans). The average cost of all of its sources of capital is expressed by a single figure, the weighted annual cost of capital ( WACC), calculated according to the relative amounts of each source of funds. [Pg.282]

The interest rate used in discounting future values is known as the discount rate and is chosen to reflect the earning power of money. In most companies the discount rate is set at the cost of capital (see Section 6.6.4). [Pg.366]

In the above example, the discount rate used was the annual compound interest rate offered by the bank. In business investment opportunities the appropriate discount rate is the cost of capital to the company. This may be calculated in different ways, but should always reflect how much it costs the oil company to borrow the money which it uses to invest in its projects. This may be a weighted average of the cost of the share capital and loan capital of a company. [Pg.319]

As stated previously, the source of capital is often not known, and hence it is not known whether Equation 2.7 is appropriate to represent the cost of capital. Equation 2.7 is, strictly speaking, only appropriate if the money for capital expenditure is to be borrowed over a fixed period at a fixed rate of interest. Moreover, if Equation 2.7 is accepted, then the number of years over which the capital is to be annualized is known, as is the rate of interest. However, the most important thing is that, even if the source of capital is not known, and uncertain assumptions are necessary, Equation 2.7 provides a common basis for the comparison of competing projects and design alternatives within a project. [Pg.24]

For example, if a company were financed 55% with debt at an average 8% interest and 45% with equity that carried an expectation of a 25% return, then the overall cost of capital would be [Pg.362]

In all cases the NPV for this project is negative, so it is not an attractive investment with a 15% cost of capital. We already knew this would be the case based on the cost of production analysis in Example 6.11, which showed that the TCOP with capital recovered at a 15% interest rate was greater than the expected revenue. [Pg.379]

Equation (9-22) may be solved graphically or analytically by an iterative trial-and-error procedure tor the value of i, which is the discounted cash flow rate of return. It has also been known as the profitability index. For a project to be profitable, the interest rate must exceed the cost of capital. [Pg.30]

In the preceding treatment of discounted eash flow, the proeedure has involved the determination of an index or interest rate whieh diseounts the annual cash flows to a zero present value when properly eompared to the initial investment. This index gives the rate of retmn whieh ineludes the profit on the projeet, payoff of the investment, and normal interest on the investment. A related approaeh, known as the method of net present worth (or net present value or venture worth), substitutes the cost of capital at an interest rate i for the [Pg.304]

The same money invested in a project with a (DCFRR) of 10 percent would, by Eq. (9-108), obtain an entrepreneurial returni = 8.37 percent on the whole investment, i.e., 8.37/ 100. Investment of the entrepreneur s own money would only achieve an aftertax return of (0.1)(1 - 0.40) = 6 percent on 50, or 3/ 100 of total investment. The incentive to the entrepreneur to manage the project thus corresponds to a tax-free income of 5.37/ 100 of total investment. In practice, money is borrowed from more than one source at different interest rates and at different tax liabilities. The effective cost of capital in such cases can be obtained by an extension of the above reasoning and is treated in detail by A. J. Merrett and A. Sykes Capital Budgeting and Company Finance, Longmans, London, 1966, pp. 30-48). [Pg.656]

If money is borrowed, interest must be paid over the time period if money is loaned out, interest income is expected to accumulate. In other words, there is a time value associated with the money. Before money flows from different years can be combined, a compound interest factor must be employed to translate all of the flows to a common present time. The present is arbitrarily assumed often it is either the beginning of the venture or start of production. If future flows are translated backward toward the present, the discount factor is of the form (1 + i) , where i is the annual discount rate in decimal form (10% = 0.10) and n is the number of years involved in the translation. If past flows are translated in a forward direction, a factor of the same form is used, except that the exponent is positive. Discounting of the cash flows gives equivalent flows at a common time point and provides for the cost of capital. [Pg.447]

See also in sourсe #XX -- [ Pg.564 ]

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