The cost of capital is among the very important theories in finance. It's the minimal acceptable rate of return that new investments must give and it signifies the long-term opportunity cost of the resources used by a corporation. If management plans to invest in jobs with expected returns over the cost of capital, the company value goes up.
Conversely, if a business invests in jobs (that despite having positive profitability) with expected returns below the cost of capital, it ruins value and business worth goes down. Likewise, the cost of capital is the discount rate that should be utilized in a discounted cash flow (DCF) analysis, in capital budgeting applications, when valuing a business or a division or an acquisition goal.
PUBLICATION DATE: January 01, 2012 PRODUCT #: IMD649-HCB-ENG
This is just an excerpt. This case is about FINANCE & ACCOUNTING
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