Cost of capital

Kapitalkostensätze sind Instrumente der Finanzwirtschaft, mit deren Hilfe die voraussichtlichen Cost of capital einer Finanzierungsmaßnahme auf Jahresbasis berechnet werden können.

Definition / explanation

The cost of capital, which is sometimes referred to as the "Weight Average Cost of Capital", is the expected interest rate that indicates the point in time at which a financing title can be created.

In this context, a distinction is made between the cost of equity, the cost of debt and the total cost of capital. When calculating the cost of capital, borrowing and equity costs, weighted according to their share in total capital, are included. The actual average loan interest is used as the cost of borrowing.

Cost of capital rates enable a company to compare different financing instruments with one another.

Calculation of the cost of capital

The cost of capital is calculated using the following formula:

Total cost of capital = equity / total capital x cost of equity + debt / total capital x cost of debt x (1 tax rate)

Summary

  • A cost of capital rate is a financial instrument that can be used to calculate the likely cost of capital for a financing measure
  • the cost of capital is also known as the “weight average cost of capital”
  • Cost of capital rates enable a company to compare different financing instruments with one another
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