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Consilient Observer
February 15, 2023

Cost of Capital

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February 15, 2023

Cost of Capital

Consilient Observer

Cost of Capital

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February 15, 2023


A Practical Guide to Measuring Opportunity Cost

  • This is a practical guide to estimating the weighted average cost of capital (WACC) for a company.
  • The cost of capital is a measure of both expected return and the discount rate. For example, investors discount future free cash flows at the WACC to come up with a present value in a discounted cash flow model.
  • Our goal is to find a figure that reflects opportunity cost sensibly, is economically sound, and provides the investor and businessperson with a solution to apply to the problem.
  • We recommend settling on a sensible cost of capital and then allocating the bulk of analytical time and attention to thinking about the potential paths of future cash flows.
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Free cash flow (FCF) is a measure of financial performance calculated as operating cash flow minus capital expenditures. FCF represents the cash that a company is able generate after laying out the money required to maintain or expand its asset base.

Weighted average cost of capital (WACC) represents a firm’s cost of capital where each category of capital is proportionately weighted.


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