Answer to Question #56730 in Economics for Dadmarie Tumblin

Question

Explain the calculation and interpretation of the cost of capital. In your response, consider how this cost impacts a health care managers decision on expansion of services, etc.

Answer 1

Cost of capital is the cost of funds used for financing a business. Cost of capital depends on the mode of financing used – the cost of equity if the business is financed solely through equity, or the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources (WACC).