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?
- dredude52Lv 61 decade agoFavorite 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 44 years ago
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- OPMLv 71 decade ago
Historical costs, while possibly interesting, are sunk costs and are irrelevant today. The future cannot be predicted, so only today matters.