What is cost of equity and cost of Debt?



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Hey
My question is from the session on WACC. You have said that the receipts from selling the house are first used to clear the debt and then divided equally among the buyer of the house and his friend. But if the friend's money is considered as equity, then why do we take it as a cost? Isn't he equally liable if the house could not be sold for a profit?

2 Answer(s)


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Ishaan - Yes the friend is equally liable if the house could not be sold for a profit. We consider it as a cost in the WACC because, the friend is not giving you the money free of cost - he is expecting returns on that money. Whatever returns he is expecting is the cost of that money. even if it were your own money it would have a cost, since you would be expecting some returns on it.

WACC basically gives you an idea about what returns you will have to give your investors who are funding any project.

Hope that is clear.

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Yes. Really well answered. Thanks a lot.

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