The cost of capital Essay Example | Topics and Well Written Essays - 750 words

The be of capital - Essay caseThe formula de full termines the appropriate expected return of alternative projects. The cost of capital is the amount that the investor has to pay in order to generate a series of future dividend incomes, return of investments (Sheridian, Martin & Keown, 2010). For example, Geoff Black (2010) reiterated the business earns $1,000,000 in wizard year. The profits will grow by 2 percent per year, and the company generates a net worth(predicate) of $16,666,667 after two years. The cost of capital is arrived at as followsAfter computing the formula, X is extend to to 8 percent cost of capital figure. Further, the cost of capital can include the return that the short letter market investors are expected to earn from their investments in a company. The firm that generates revenues more than the amount of cost of capital will entice the companys current and prospective investors to invest additional coin into the invested companys coffers.For example, Mi crosoft generated a 53 percent return on its fair-mindedness. The companys equity is $7.2 billion. Computing, the companys return on equity is $3.8 Billion. If the companys cost of capital is 14 percent, the companys cost of capital is $1.0 Billion. The companys residual income is $2.8 Billion. ($3.8 Billion - $ 1.0 Billion). Another term for the $2.8 Billion net income is residual income or Economic Value Added (EVA). Under the Economic Value Added (EVA), management is faced with the financial question whether the assets can be better used in other areas or by fresh management.