why care firms cost of capital

why a firm should care about its cost of capital?
ans: a firm needs to know its cost of capital before it can make decision to invest a project or not. e.g. if a firm cost of capital is 6%, it will only invest on project with return higher than this 6%.

what does high return mean? what does low return mean?
ans: "high" and "low" have no definition. they are relative terms only. usually, we will compare the return of a project to the return of similar projects in the market. if the company project return is higher than the market, we will say it high return, and the vice versa.

HIGH OR LOW is better?
ans: the rule of thumb is "high risk high return, low risk low return". if you like risk, then high return will be better to you. if you don't like risk (risk adverse), then low return is better.

Cost of Capital is similar to cost of borrowing, i.e. how much interest the

company has to pay for every dollar it borrows. You will get a better picture

of how sensible investment decisions are made by going to:

Cost of Capital

The Capital Asset Pricing Model

Net Present Value - An Overview

- better pay attention to the Weighted Average Cost of Capital

- Net Present Value (The time value of money)

- CAPM (The Capital Asset Pricing Model)


Happy to help others.





2009-11-15 23:36:21 補充：
Also go to:

http://basiccollegeaccounting.com/basic-understanding-of-cost-of-capitalweighted-average-cost-of-capital/