Question

why is the cost of capital important for a business?

Answer 1

Cost of capital is calculated using the weighted average cost of capital and it is important for a business for the below reasons:

1.It talks about the return to be expected by both creditors and stockholders.

2. It helps investors decide whether a project should be funded.

3. A firm’s WACC reflects the average risk of the projects, which make up the firm.

4.Mangers can derive an optimal capital budget with the help of WACC.

5.It helps in making financial decisions.

6.It shows management the cost of borrowing and the cost of equity.

7. It talks about the return to be expected by both creditors and stockholders. It helps investors decide whether they should fund a project.

In case of any query, kindly comment on the solution.