Please enable JavaScript.
Coggle requires JavaScript to display documents.
🧠Mind Map: Cost of Capital & The Invisible Price Tag on Money -…
🧠Mind Map: Cost of Capital & The Invisible Price Tag on Money - Sebastián Hernández Pérez
Definition
Minimum return required by investors
Cost of financing a business
Opportunity cost of investing money
Components of Cost of Capital
Debt (Cost of Debt)
Interest paid on loans
Lower cost due to tax deductibility
Example: bank loans, bonds
Equity (Cost of Equity)
Return required by shareholders
Higher risk → higher cost
No obligation to repay
Weighted Average Cost of Capital (WACC)
Combines debt and equity
Formula concept:
Weighted proportion of each source
Used as:
Discount rate in projects
Investment decision tool
Importance of Cost of Capital
Determines project viability
Used in:
NPV (Net Present Value)
IRR (Internal Rate of Return)
Helps maximize firm value
Risk and Return Relationship
Higher risk → higher required return
Investors expect compensation for risk
Affects cost of equity directly
The Invisible Price Tag on Money
Hidden Cost Concept
Money is not free
Every financial decision has a cost
Even “own money” has opportunity cost
Opportunity Cost
Choosing one option = losing another
Key for decision-making
Time Value of Money
Money today > money tomorrow
Inflation reduces value
Interest reflects this
Decision-Making Impact
Businesses must:
Compare returns vs cost of capital
Accept project if:
Return > Cost of Capital
Reject if:
Return < Cost
Real-World Application
Investments
Loans
Business expansion
Personal finance decisions