A method of calculating the depreciation on a fixed asset designed to produce a constant annual charge that includes both depreciation and the cost of capital.
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 effective overall rate of interest that a company pays on its loans, bonds, and other debts, used in calculating the total cost of capital for that firm. This is usually calculated as an after-tax figure.
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 Dividend Growth Model (DGM) is a fundamental method used to estimate the cost of equity by using dividends currently paid along with their projected growth rate.
Economic Value Added (EVA) is a performance measure used to evaluate a company's economic profit, which represents the value added to a company by its activities within a given time period.
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.
The overall cost of raising additional finance, reflecting the increased risks and required returns for equity and debt funders due to increased financing.
An interest rate that gives a net present value (NPV) of zero when applied to a projected cash flow of an asset, liability, or financial decision.
Lifetime Value (LTV) is a metric used to forecast the future profitability a customer will bring to a business over the entire duration of their relationship with the company. It is pivotal in making strategic decisions related to marketing, customer acquisition, and retention.
The term 'pool' has various definitions across different industries including corporate finance, industry, insurance, investments, and real estate. It generally refers to a combination of resources or funds for a specific purpose.
Residual income is the net income generated by a subsidiary or division after accounting for the costs associated with the capital it uses. This metric is particularly useful in determining the profitability and efficiency of investment projects within larger organizations.
A method for valuing the entire equity in a company, based on the net present value of future cash flows. Developed by Alfred Rappaport in the 1980s, Shareholder Value Analysis (SVA) emphasizes the time value of money and focuses on future performance rather than past accounting records.
The weighted average cost of capital (WACC) represents a firm's average cost of capital from all sources, including both equity and debt, weighted by their respective usage in the firm's capital structure.
Understanding the calculation and implication of WACC in managing a company's capital structure and assessing project feasibility.
