11.2 The importance of the cost of capital Flashcards
1
Q
What is the cost to the company of capital?
A
The rate of return required by the providers of the capital.
2
Q
Why is the cost of capital an important factor in financial decision making?
A
It determines whether money could be better used elsewhere (i.e. is the cost of capital worthwhile?)
3
Q
In what 2 ways do financial managers use the cost of capital?
A
1 In designing balanced and optimal capital structures
2 In evaluation of new project or investment options.
