BusinessModelSearchThe cost of capital has two components: the cost of equity and the cost of debt, with the weighted average cost of capital (WACC) depending on the respective share of each (equity and debt) in total capital requirements. It is one of the most important drivers of capital budgeting, investment and value creation. The size of the percentage point margin projected to be earned over the cost of capital is one of the three drivers of value (the other two including the volume of capital investment opportunities and the number of years during which high and value creating returns can be realized).
A recent publication by Jacobs and Shivadasani (2012) reported from a survey of 15,000 financial officers that their calculations of the cost of capital were often out by 1% point or more, leading to various states of under or over-investment and value destruction. Do you know your real cost of capital? Test it with this Cost of Capital tool.