2017•Unpublished venueRequires access
The Cost of Capital
Pierre Vernimmen, Yann Le Fur, Maurizio Dallochio, Antonio Salvi, Pascal Quiry
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Abstract
The cost of capital has to be factored into investment decisions because it is the rate that is used for discounting cash flows for NPV or comparing with the IRR. The cost of capital is the minimum rate of return on the company's investments that can satisfy both shareholders and debtholders. The cost of capital is thus the company's total cost of financing. The costs of equity and debt are a function of the risk of the assets, the cost of overall capital and the respective weighting of each. The cost of capital can be calculated in three ways: directly, indirectly or via enterprise value. If the company is not listed, the calculation is based on the cost of capital of companies of comparable size and risk operating in the same sector of activity. The overall cost of capital of a diversified company can be calculated similarly to a company with a single business.