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Hello,
I would now like to ask a few questions about cost of capital.
1) Some sources state that cost of capital consists of cost of debt and cost of equity which are in short are money received by a company from someone (bank, shareholder, other creditor etc.). For example, Kaplan materials I use and the Opentuition F2 lectures about WACC talk only about cost of debt and cost of equity. But other sources state that cost of capital includes opportunity costs as well. And in one of the P2 lectures on NPV opportunity costs are briefly mentioned. Could you please clarify whether Opportunity costs are actually a part of Cost of capital?
2) I thought that cost of capital represents cost of the whole capital the company has at the moment. I.e. it covers not just the new capital not yet received by the company but also the one it has for a while (e.g. loans it got a while ago, shares it issued a while ago). But after I went through WACC materials I am not sure that my understanding is correct, and cost of capital actually covers new capital that was not yet received. Could you please clarify this?
Thank you in advance.
Hi,
1) Opportunity costs are not part of the WACC calculation.
2) WACC is used if there is no change in either the capital structure (debt/equity) or the business risk of the new project. This will be the case at this lever where neither change. If either of them change then we have to use a slightly different method which is covered in later papers.
Thanks
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