Risk capital cost
Introduction
Many times it is believed that companies for being their own do not merit a capital cost for a new investment. In this case this article will be benefiting for those who have doubts like that above. The capital cost is an essential measure in any business, whether own or not, this initiated or in project. It is that it depends on this investment cost that will take value the investment of this company. However, it will always be affected by the level of risk that the company has.
Although the investment cost is acceptable if the level of risk is high, the company will cost anything. This occurs when new investors are needed that make this slight poll.
Developing
Main capital cost features
- Improve the efficiency of the company.
- Allows to act in advance of some future events.
- It is not directly observable, that is, it is not a direct calculation, it depends on many other circumstantial factors.
- Allows to evaluate the profitability of an investment.
- It is proportional to the risk, that is, at the highest risk of capital cost.
The 4 determining factors of the capital cost will be detailed below and are:
Global economic conditions
This factor directly affects costs. Refers to the way supply and demand affect investment. If demand increases, investors claim more profits. But on the contrary there are negative changes in the offer, capital costs will also descend.
Financial and operational conditions of the company
The operation and commissioning of a company influences the performance of the same. The variation in performance produces an economic risk and indebtedness variations increase financial risk. Both risks interfere directly into the cost of capital, but they are specific risks and can be overcome.
Market conditions
If the investment project is not very profitable or very risky, the capital cost is greater. The company’s liquidity rates are lower and will need more financing.
Amount of financing
The greater the amount of shares lower price of these in the market. But when the company has a very poor financing flow, the capital cost will vary depending on the risks. It can also be said that these elements are manageable according to the company’s management capacity. It is the direct responsibility of the manager to make accurate decisions to settle debts without generating more risks.
To calculate the capital cost, a very simple mathematical formula is used and identified as ke. Being, the constant rate of increase in dividends on the nominal value and the price of the company. Then to calculate that the value of DO, which is given by the nominal value multiplied by the constant annual increase rate or dividend.
Now it is necessary to calculate the nominal value that will be equal to the share capital between the number of shares. For example, Pedro has a textile company with a social capital of € 60000 and is offering 100 shares quoted at € 300 each. An annual 5% dividend is also aspired to the nominal value.
Capital cost types
There are three types of capital cost, the cost of preferential shares and debt cost. It is important to note that these different types of costs are affected by the type of financing that a company has. These sources of financing can be their own or others.
Capital cost of the shareholder
The capital cost of the shareholder is the contribution that each shareholder invests to carry out a project.
Cost of preferential actions
The cost of preferential shares will be given by the contribution that each potential shareholder accredits in a company for the elaboration of a project.
Debt cost
Requirement rate demanded by the lenders or creditors of the company.
Importance of capital cost
Capital cost is a referential to evaluate the profitability of an investment. However, it becomes much importance in the company’s accounting when it is possible to determine the financial structure of a project. That is, the importance of capital cost lies in the programming to do a profitable business.
When making the capital cost you can make accurate or not decisions for the company. Everything will depend on the brain of the organization, but in most cases it helps for good. A good capital cost will be relevant to get financing to new projects that translate into profits for the company. In short, the capital cost is related to the funds used by the company to carry out the production. For all the above it is essential to make a capital cost if you are betting on the success of the project.
conclusion
The capital cost is defined as the contribution that each shareholder invests to carry out a project. This in turn affects the profit that the firm pays to its shareholders for using their money. In other words, what costs the businessman to be part of a new investment project of a specific company. In the same way, dividends are considered that in turn this investment will generate. Many companies work with their own capital and others with funded capital. These financing can be financial or individual units. In any way, capital costs must be calculated to estimate a possible profit margin.
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