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How does cost of debt differ from the required rate of return for bondholders?
Question 4 How does the cost of debt differ from the required rate of return for bondholders?
The cost of equity and the required rate of return are equal to what?
The cost of equity is the return that investors expect for holding a company's equity, reflecting the risk of the investment. The required rate of return is the minimum return an investor expects to earn from an investment, compensating for its risk. In essence, the cost of equity and the required rate of return are equal as they both represent the expected return that justifies the risk taken by investors in equity securities.
Why does the investors required rate of return differ from the firms cost of capital?
The investor's required rate of return differs from the firm's cost of capital because investors have varying risk tolerances, investment horizons, and required returns based on their individual circumstances. The firm's cost of capital reflects the average rate of return it needs to pay to finance its operations and investments, typically representing the weighted average of its debt and equity costs. Additionally, market conditions and specific project risks can influence the perceived return expectations for investors, leading to discrepancies. Ultimately, while both rates are related to the cost of financing, they are derived from different perspectives and considerations.
Why is cost associated with internal equity?
nIf managers are investing shareholders' funds, shareholders will expect to earn their required rate of return nFor internal equity, the required rates of return are equivalent to the cost as no issue costs are involved
What are two other terms that are used interchangeably with the term 'cost of capital'?
Two terms often used interchangeably with 'cost of capital' are 'required return' and 'hurdle rate.' The required return refers to the minimum return an investor expects to earn for taking on the risk of an investment. The hurdle rate is the minimum acceptable return rate that a project must achieve to be considered worthwhile.
How do you calculate minimum Required Rate of Return?
The minimum Required Rate of Return should be calculated by looking at the rate of return that would be gained by putting money in a savings accounts that accrues interest at the current rate. If you investment is not projected to make more profit than that it does not meet the minimum Required Rate of Return.
What happens if the IRR is greater than the required rate of return?
The IRR rule states that if the internal rate of return (IRR) on a project or investment is greater than the minimum required rate of return - the cost of capital - then the decision would generally be to go ahead with it. Conversely, if the IRR on a project or investment is lower than the cost of capital, then the best course of action may be to reject it.
What was the cost of return airline ticket from San Francisco to Hong Kong on January 2 2015?
It depends which airline you used and what type of ticket was required.
Which cost are required to running a business?
Although the costs can differ from one venture to another, you need to spend on stock, staff, rent, transport, electricity, stationery, advertising, etc.
What internal benefits does using WACC offer for a company?
The weighted average cost of capital (WACC) represents a firm's average cost of capital from all sources, including common stock, preferred stock, bonds, and other forms of debt. The weighted average cost of capital is a common way to determine require rate of return because it expresses, in a single number, the return that both bondholders and shareholders demand in order to provide the company with capital. A firm’s WACC is likely to be higher if its stock is relatively volatile or if its debt is seen as risky because investors will demand greater returns.
What is meant by the phrase different cost figures for different purpose?
they differ over range of costs included current and future costs assumed the frequently product costing information is required
How do you Calculate a Return on an Investment?
The return on investment formula:ROI=(Gain from Investment - Cost of Investment)/Cost of Investment.
