The cost of capital is the return, expressed in terms of an interest rate, required by an organization to finance its activities. It can vary depending on the types of capital employed, such as equity share capital or loan capital. A unique weighted average cost of capital (WACC) is often computed for each organization based on their specific mix of capital sources. The cost of capital is frequently used as a hurdle rate in discounted cash flow calculations.
The discount factor, also known as the present-value factor, is a figure used to determine the present value of future cash flows by considering the time value of money and a specific hurdle rate.
An interest or cost of capital rate applied to discount factors in discounted cash flow (DCF) appraisals, used in determining the present value of future cash flows.
Discounted Cash Flow (DCF) is a financial valuation method used to appraise investments, architectures in capital budgeting, and other expenditure decisions by analyzing the predicted cash flow stream (incomes and outflows) and discounting them to present values using a specific cost of capital or hurdle rate.
The hurdle rate is the minimum rate of return on an investment or project that a manager or company seeks to achieve before it generally discusses or explores the project. This rate is also known as the required rate of return or the benchmark rate.
Marginal Cost of Capital represents the cost of financing for the next dollar of capital raised. Different sources of capital, such as subordinated debt, can have varying costs. This metric is crucial for determining the hurdle rate in discounted cash flow and present value analysis.
Present value, also known as discounted value, is the current worth of a sum of money or a stream of cash flows that will be received or paid in the future, calculated using a specific discount rate. It is an essential concept in finance, particularly in discounted cash flow (DCF) analysis.
