University of St.

La Salle Bacolod City

Yu an Log College of Business and Accountancy

Financial Management
Engage: What is Cost of Capital

Submitted to:
Miss Gale Florence Escandelor

Submitted by:
Cañete, Miel
Cotelo, Isabella Beatrice
Somuelo, Raesl Vien
Tupas, Benjamin Josef
Zaragosa, Kenneth

OPM201_C
 What is Cost of Capital

a. Is it the cost of raising funds for a business?

b. Is it the hurdle rate used by businesses to determine whether to invest in new

projects?

c. Is it a metric that drives whether to return cash, and if yes, how much to
return to investors in dividends and stock buybacks?

d. Is it a discount rate that is used when valuing an entire business?

No. The cost of capital is the company’s required return and discount rate is
the rate used to discount the future cash flows from an investment to the present value
to determine if an investment will be profitable.
The company's lenders and shareholders want to be compensated for deferring their
own consumption and taking on investment risk. The cost of capital aids in
determining a target return that the business must meet in order to satisfy its debt and
equity holders, whereas, discount rate helps estimate how much the project's future
cash flows would be worth in the present. The discount rate usually takes into
consideration a risk premium and therefore is usually higher than the cost of capital.

e. Is it an optimizing tool for deciding on the right mix of debt and equity for a
company?