Opportunity Cost Of Capital Assignment Help

Opportunity Cost Of Capital

This is a component in economics and accounting which refers to the incremental return from the business investment that a business foregoes when it decides to use the funds for the internal project instead of investing the funds in a market security.

Factors affecting opportunity cost of capital

a) Capital structure policy

The business company usually has absolute control over its capital and a design plan to achieve maximum capital structure during the operation. The plan for the maximum capital structure is achievable however there are usually debts incurred by the business organization that always affect the maximum capital structure through issuing of debts that results to an increase in the cost of debts in the business organization. There is also equity that always results during the company's operation that always leads to an increase in the cost of equity in the market.

b) Investment policy

The business the assumption is always that when developing a decision on investment, a company will make an investment and a similar degree of risk during the process. This usually arises due to changes that always present when a business enterprise alters its investment policy to suit the state of the market, and during the change, the cost of the company’s equity expenses and cost always change too.

c) Level of interest rates

The opportunity cost of capital is always affected by the interest rates in the market. The state of the market always has the potential to change the interest rate especially when the interest rates increase in the market, the cost of debts always increases as well which influences the company’s incremental returns.