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Cost of capital - Coggle Diagram
Cost of capital
Cost of capital:
Its the minimum return required by te investors (debt + equity)
Its a decision making benchmark
"The high jump bar"
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Given example:
Its a Public utility, regulated monopoly
The conflict is:
The company wants higher retruns
The costumer/regulators want lower prices
Decide: if the cost of equity should be 12.5% or 11%
important! Small % differences are equal to millions of dollars
Sources of capital:
Debt or equity
debt- loans, bonds. lower cost, paid first.
equity- shareholders money, higher cost, paid last
Trade off:
debt: its cheaper but increases risk
equit: its safer for company but expensive
The goal its to find optimal balance
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