The cost of capital for any particular business or project is the rate of return required by the providers of capital (both debt and equity) having regard to the risk characteristics inherent in the project. Businesses or projects which are able to earn returns greater than the cost of capital add value for investors. Conversely, businesses or projects which, while they may still be profitable, produce returns less than the cost of capital "destroy" investor value.
Equity investors have two components for their cost of capital:
- an explicit opportunity cost such as dividend payments; and
- an implicit opportunity cost in the form of an expected cash equivalent gain in share price.
The return to debt investors is in the form of interest payments.
The PricewaterhouseCoopers Corporate Finance team can determine a specific WACC for your company, business or for a particular project. For further information on this, and other services provided by our Corporate Finance Team, visit our
Corporate Finance page.
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