Finance / July 18, 2018 / Parker Hardy
Cost of Equity is the rate of return a shareholder requires for investing equity into a business. The rate of return an investor requires is based on the level of risk associated with the investment, which is measured as the historical volatility of returns. A firm uses cost of equity to assess the relative attractiveness of investments, including both internal projects and external acquisition opportunities. Companies typically use a combination of equity and debt financing, with equity capital being more expensive.
Debt is one part of a firm’s capital structure. A firm uses various bonds, loans and other forms of debt, so cost of debt is the rate paid by the firm to use this debt as a means of finance. Multiplying the before-tax rate (by one, minus the marginal tax rate) gives the after-tax rate. This measure gives the investors an idea of the riskiness of the firm compared to others in the industry. A firm with a higher risk profile will have a higher cost of debt, so the cost of borrowing decreases as debts become safer.
The amount of cash or cash-equivalent which the company receives or gives out by the way of payment(s) to creditors is known as cash flow. Cash flow analysis is often used to analyse the liquidity position of the company. It gives a snapshot of the amount of cash coming into the business, from where, and amount flowing out.
Fixed assets are also known as Infrastructure Assets, which can include road signs, bridges, tunnels, water and sewer systems, dams and lighting systems, land, buildings, equipment and machinery. Fixed assets differ from moveable assets in that fixed assets are fixed in place, typically attached or connected to a building, while moveable assets are not. Fixed assets are not inventory or items available for resale, but are company property often used in the course of conducting business.
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