Question

What are the various types of cost of capital? Explain any two uses of cost of capital.

Answer 1

• The cost of capital is also commonly called the discount rate, the expected return, or the required return. There are three broad valuation approaches: (i) the income approach, (ii) the market approach, and (iii) the cost or asset-based approach.

• A company's cost of capital is simply the cost of money the company uses for financing. If a company only uses current liabilities, such as supplier credit, and long-term debt to finance its operations, then its cost of capital is whatever interest rate it pays on that debt

Answer 2

The cost of capital is also commonly called the discount rate, the expected return, or the required return.

There are three broad valuation approaches:

(i) the income approach

(ii) the market approach

(iii) the cost or asset-based approach

The income approach

The income approach is a type of real estate appraisal method that allows investors to estimate the value of a property based on the income the property generates. It's used by taking the net operating income (NOI) of the rent collected and dividing it by the capitalization rate.

The market approach

The market approach is a business valuation method that can be used to calculate the value of property or as part of the valuation process for a closely held business.

Additionally, the market approach can be used to determine the value of a business ownership interest, security, or intangible asset.

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