Cost of capital

Résumé

In economics and accounting, the cost of capital is the cost of a company's funds (both debt and equity), or from an investor's point of view is "the required rate of return on a portfolio company's existing securities". It is used to evaluate new projects of a company. It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. Basic concept For an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital. Given a number of competing investment opportunities, investors are expected to put their capital to work in order to maximize the return. In other words, the cost of capital is the rate of return that capital could be expected to earn in the best alternative investment of equivalent risk; this is the opportunity cost of capital. If a project is of similar risk to a company's average business activities it is reasonable to use the company's average

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https://en.wikipedia.org/wiki/Cost_of_capital

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, ,

The application of systematic methodologies for the optimal design of integrated processes has seen increased interest in literature, namely for bioprocesses. The development and application of such a methodology to ethanol and power production from sugarcane and leaves, in a combined distillery and cogeneration plant is investigated in this article. The methodology breaks down as follows: process simulation, heat integration and thermo-economic evaluation, bi-objective multi-variable evolutionary optimization, and process selection. The objective functions are exergy efficiency and capital cost, whereas the selection criterion is the maximization of the Net Present Value (NPV). This choice was motivated by the variation in process related market parameters and their impact on profitability. Optimization generated 31 optimal trade-off solutions with better results than literature. Exergy efficiency ranged between 37.6% and 41.7% and capital costs between 155 M

and 210 M

. Process selection led to a single configuration maximizing NPV for four economic scenarios. The configuration's exergy efficiency and capital costs were equal to 40.63% and 163 M$. This point presented an optimal compromise between heat integration and capital costs. This article provides a breakthrough in the application of this methodology, to the investigated process specifically. (C) 2016 Elsevier Ltd. All rights reserved.

Pergamon-Elsevier Science Ltd2016

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Can managerial discretion explain observed leverage ratios

Erwan Morellec

This article analyzes the impact of managerial discretion and corporate control mechanisms on leverage and firm value within a contingent claims model where the manager derives perquisites from investment. Optimal capital structure reflects both the tax advantage of debt less bankruptcy costs and the agency costs of managerial discretion. Actual capital structure reflects the trade-off made by the manager between his empire-building desires and the need to ensure sufficient efficiency to prevent control challenges. The model shows that manager-shareholder conflicts can explain the low debt levels observed in practice. It also examines the impact of these conflicts on the cross-sectional variation in capital structures.

Oxford University Press2004

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, ,

and 210 M

Pergamon-Elsevier Science Ltd2016