Capital, in an economic sense, means not only the result of financial and economic activity but also an independent object, a means to increase surplus value.That is, for the definition of capital as well as possible fits the phrase "money makes money".Like any tool to generate income, the capital has a cost.The price of capital is determined by a number of factors and financial performance.
This term prospective investors understand the level of income from the investment of their funds.In other words, the cost of capital - is the level of income from the placement of capital investment expected by the investor for a certain period of utilization of the funds at a constant level of risk capital.
As can be seen, the cost of capital is influenced by such factors as:
- the value of return on alternative investments.Accepted always compare the estimated level of profitability of investments with the average interest rate on term deposits of commercial banks in the region;
- the magnitude of the risks of investments.After all, according to the canons of economic theory and financial management of the lowest riskiness of placing funds is precisely the banking sector, and accordingly - and the lowest rate of return on investment.The higher the level of riskiness of the investment, the higher the cost of capital.Therefore, I wish to quickly make a lot of money more at risk than investors who prefer a small, but stable and guaranteed return on their investment.
very entrepreneurial activity has a different yield types.Depending on the choice of type of financing depends on the price of capital.For example, illegal or limited types of enterprise guarantee return on investment, several times the amount of investment.But the risk is prohibitive, because even could face criminal penalties.Legitimate business brings a stable long-term income, but on a smaller scale.
weighted average cost of capital is determined as a percentage of the value of an investment given the time investment and called discount.The order of its calculation similar to the calculation of bank interest rates, which, in fact, is also a discount on investment in the banking sector through the transfer of rights to manage their finances professional financial market participants - financial institutions.
professional market players - financial institutions (banks, insurance companies, mutual funds, credit unions, etc.) accumulate from depositors (investors) funds, the portfolios of which form where the classifiers are the price and the capital structure.In addition to financial institutions, investors can serve individuals, business entities and their owners.The price of capital invested by them differs in its defining characteristics: the time value and risks.
