COST CONCEPTS Flashcards
What is cost?
The amount paid for a resource or asset
What is expense?
expense is the portion of cost that relates to the portion of the resource (or asset) that has been used up
What is a sunk cost?
The costs of resources incurred in the past; they cannot be changed by current or future decisions. Therefore, sunk costs are irrelevant to current and future decision making.
What is opportunity cost?
The discounted dollar value of benefits lost from the next best opportunity as a result of choosing another opportunity
What are incremental (differential) costs?
Those costs that are different between two or more alternatives
What is “cost of debt”?
The rate of return that must be earned in order to attract and retain lenders’ funds
What is “cost of preferred stock”?
The rate of return that must be earned in order to attract and retain preferred shareholders’ investment
What is “cost of commons stock”?
The rate of return that must be earned in order to attract and retain common shareholders’ investment.
What is “weighted average cost of capital (wacc)?
WACC is calculated as the required rate of return on each source of capital weighted by the proportion of total capital provided by each source, and the resulting weighted costs summed to get the total weighted average.
