The cost of capital refers to the price paid by enterprises to raise and use funds. Capital cost includes two parts: financing cost and capital occupation cost. Financing expenses refer to various expenses paid in the process of financing, such as printing fees, attorney fees, notarization fees, guarantee fees and advertising fees paid for issuing stocks and bonds.
In reality, it is impossible for enterprises to use only a single financing method, and they often need to raise the required funds through various means. In order to make financing decisions, it is necessary to calculate the comprehensive cost of all funds of the enterprise. In general, the comprehensive capital cost is determined by weighting the proportion of various funds to the total capital, while the single capital cost is determined by weighted average, so it is also called weighted average capital cost.
2. The determination of discount rate should usually be based on the market interest rate of assets. If it is not available in the market, the discount rate can be estimated by using alternative interest rates. The alternative interest rate can be determined after appropriate adjustment according to the weighted average capital cost, incremental borrowing rate or other relevant market borrowing rates.
When adjusting, the specific risks related to the expected future cash flow of assets and other related currency risks and price risks should be considered. When estimating the present value of future cash flows of assets, a single discount rate should usually be used; If the present value of assets' future cash flow is sensitive to the risk difference or interest rate term structure in different periods in the future, different discount rates should be used.
Forecasting the future cash flow of assets should usually be based on the most likely future cash flow of assets. It uses a single expected future cash flow and a single discount rate to predict the present value of future cash flow of assets.
If these factors have been adjusted in the expected future cash flow of assets, they should be eliminated. When estimating the alternative interest rate, enterprises can make appropriate adjustments according to the weighted average cost of capital, incremental borrowing rate or other relevant market borrowing rates. When adjusting, the specific risks related to the expected cash flow of assets and other related currency risks and price risks should be considered.