In computing the cost of capital, why do we use the current costs of existing debt and equity?

In computing the cost of capital, why do we use the current costs of existing debt and equity, instead of the historical costs of existing debt and equity as determined in the market?

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  • 1 decade ago
    Favorite Answer

    Probably to allow for the current cost of money, borrowing cost, and carrying cost, all tied to a fluctuating yield or interest rate (current).

    We don't want to know the cost of money last year (historical), but today.

    Don't forget, the cost of capital is a "weighted" sum of the cost of equity and the cost of debt (external), and reinvesting prior earnings.

    Do you want to "weight" the past or present?

  • 1 decade ago

    the current debt and equity numbers are an accurate account of the credit rating of a company and therefore the required return or the cost of capital. Debt and equity are used directly to compute the Weighted Average cost of Capital or the WACC

  • ?
    Lv 4
    4 years ago

    " a enterprise is suffering and would desire to in all likelihood circulate out of enterprise and all its workers will for this reason lose their jobs, they hire companies like Bain capital who are available in and attempt to streamline the enterprise ..." They then outsource all the jobs and each physique right here finally ends up dropping their activity besides. "... And Mitt became into very valuable at this activity. sure human beings lost jobs, yet different jobs have been stored." good, the seat shiners hung on. And the "enemy" workers have been given the shaft.

  • OPM
    Lv 7
    1 decade ago

    Historical costs, while possibly interesting, are sunk costs and are irrelevant today. The future cannot be predicted, so only today matters.

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