Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in comparable financial securities.

Similar financial terms

Portfolio opportunity set
The expected return/standard deviation pairs of all portfolios that can be constructed from a given set of assets.

Opportunity set
The possible expected return and standard deviation pairs of all portfolios that can be constructed from a given set of assets.

Opportunity costs
The difference in the performance of an actual investment and a desired investment adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able to implement all desired trades. Most valuable alternative that is given up.

Equal Credit Opportunity Act (ECOA)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.

Agency costs
The cost of resolving the agency problem. These might include stock options and bonus schemes to managers.

Transactions costs
The transactions costs are the expenses to the execution of a trade. It includes the commissions plus the difference between the price obtained and the midpoint of the bid-offer spread.

Storage costs
The cost of storing commodity.

Cost of sales
The costs associated with generating reported sales, including merchandise, direct labor, and other costs attributed to current sales activity.

Direct costs
Costs related directly to sales.

Dollar cost averaging
A system of investing in which an unchanging dollar amount is invested at regular intervals, regardless of share price.

Accelerated cost recovery system (ACRS)
Schedule of depreciation rates allowed for tax purposes.

Agency cost view
The argument that specifies that the various agency costs create a complex environment in which total agency costs are at a minimum with some, but less than 100%, debt financing.

All-in cost
Total costs, explicit and implicit.

Weighted average cost of capital
The weighted average cost of capital (WACC) is the expected return on a portfolio of all the firm's securities when debt, equity and tax shields are taken into account. Used as a hurdle rate for capital investment.

Variable cost
A cost that is directly proportional to the volume of output produced. When production is zero, the variable cost is equal to zero. A variable is a cost of producing the product which a company sells. It would include such items as materials and labor that go directly into producing the shipped item. Another term for this is direct cost. These costs are usually shown directly under revenues on an income statement as the first costs associated with producing the revenues that are recorded.

True interest cost
For a security such as commercial paper that is sold on a discount basis, the coupon rate required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays interest in arrears.

Trading costs
Costs of buying and selling marketable securities and borrowing. Trading costs include commissions, slippage, and the bid/ask spread. See: transaction costs.

Sunk costs
Costs that have been incurred and cannot be reversed.

Shortage cost
Costs that fall with increases in the level of investment in current assets.

Search costs
Costs associated with locating a counterparty to a trade, including explicit costs (such as advertising) and implicit costs (such as the value of time).

Round-trip transactions costs
Costs of completing a transaction, including commissions, market impact costs, and taxes.

Replacement cost
Cost to replace a firm's assets.

Net financing cost
Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.

Market timing costs
Costs that arise from price movement of the stock during the time of the transaction which is attributed to other activity in the stock.

Market impact costs
Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.

Bankruptcy cost view
The argument that expected indirect and direct bankruptcy costs offset the other benefits from leverage so that the optimal amount of leverage is less than 100% debt finaning.

Carring costs
Costs that increase with increases in the level of investment in current assets.

Cost company arrangement
Arrangement whereby the shareholders of a project receive output free of charge but agree to pay all operating and financing charges of the project.

Cost of capital
The required return for a capital budgeting project.

Cost of funds
Interest rate associated with borrowing money.

Cost of lease financing
A lease's internal rate of return.

Cost of limited partner capital
The discount rate that equates the after-tax inflows with outflows for capital raised from limited partners.

Cost-benefit ratio
The net present value of an investment divided by the investment's initial cost. Also called the profitability index.

Avoided cost
In context of project financing, the capital and expense that would have to be spent if the project did not proceed.

Replacement cost
What it would cost today to replace a company’s existing assets.

Fixed costs
Production expenses that are independent of the level of output. Fixed costs could include debt repayments, security costs and marketing and administration costs.

Zero Cost Collar
Is a transaction which has little or zero cash outlay or cost for the initiating person. Often, a security is held and some protection is sought via a hedging transaction. One example, would be the purchase of an out-of-the-money put (debit) and the sale of an out-of-the-money call (credit). Here, the premiums for the debit and credit are nearly the same. Therefore, there would be little or no cost for the person seeking the hedge. However, this position places a cap on the potential reward for ...

Capital stock
The value of an outstanding share of stock at the time it was issued

Capitalization
The combined sources of capital, consisting of dept capital (liabilities) and equity capital (capital stock and retained earnings).

Working capital ratio
Working capital expressed as a percentage of sales.

Working capital management
The management of current assets and current liabilities to maximize short-term liquidity.

Working capital
Defined as the difference in current assets and current liabilities (excluding short-term debt). Current assets may or may not include cash and cash equivalents, depending on the company.

Venture capital
An investment in a start-up business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Static theory of capital structure
Theory that the firm's capital structure is determined by a trade-off of the value of tax shields against the costs of bankruptcy.

Soft Capital Rationing
Capital rationing that under certain circumstances can be violated or even viewed as made up of targets rather than absolute constraints.

Real capital
Wealth that can be represented in financial terms, such as savings account balances, financial securities, and real estate.

Pro forma capital structure analysis
A method of analyzing the impact of alternative capital structure choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will be able to use projected tax shield benefits fully.

Planned capital expenditure program
Capital expenditure program as outlined in the corporate financial plan.

Pie model of capital structure
A model of the debt/equity ratio of the firms, graphically depicted in slices of a pie that represent the value of the firm in the capital markets.

Personal tax view (of capital structure)
The argument that the difference in personal tax rates between income from debt and income from equity eliminates the disadvantage from the double taxation (corporate and personal) of income from equity.

Perfect market view (of capital structure)
Analysis of a firm's capital structure decision, which shows the irrelevance of capital structure in a perfect capital market.

Perfect capital market
A market in which there are never any arbitrage opportunities.

Pecking-order view (of capital structure)
The argument that external financing transaction costs, especially those associated with the problem of adverse selection, create a dynamic environment in which firms have a preference, or pecking-order of preferred sources of financing, when all else is equal. Internally generated funds are the most preferred, new debt is next, debt-equity hybrids are next, and new equity is the least preferred source.

Outstanding share capital
Issued share capital less the par value of shares that are held in the company's treasury.

Other capital
In the balance of payments, other capital is a residual category that groups all the capital transactions that have not been included in direct investment, portfolio investment, and reserves categories. It is divided into long-term capital and short-term capital and, because of its residual status, can differ from country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a year or more like bank loans and mortgages. Other short-term capital i ...

Nondiversifiability of human capital
The difficulty of diversifying one's human capital (the unique capabilities and expertise of individuals) and employment effort.

Net working capital
Current assets minus current liabilities. Often simply referred to as working capital.

Market capitalization rate
Expected return on a security. The market-consensus estimate of the appropriate discount rate for a firm's cash flows.

Market capitalization
The total dollar value of all outstanding shares. Computed as shares times current market price. It is a measure of corporate size.

Long-term debt/capitalization
Indicator of financial leverage. Shows long-term debt as a proportion of the capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and common stockholder equity.

Legal capital
Value at which a company's shares are recorded in its books.

Capital
Money invested in a firm.

Capital account
Net result of public and private international investment and lending activities.

Capital allocation decision
Allocation of invested funds between risk-free assets versus the risky portfolio.

Capital budget
A firm's set of planned capital expenditures.

Capital budgeting
The process of choosing the firm's long-term capital assets.

Capital Builder Account (CBA)
A Merrill Lynch brokerage account that allows investors to access the loan value of his or her eligible securities to buy or sell securities. Excess cash in a CBA can be invested in a money market fund or an insured money market deposit account without losing access to the money.

Capital expenditures
Amount used during a particular period to acquire or improve long-term assets such as property, plant or equipment.

Capital flight
The transfer of capital abroad in response to fears of political risk.

Capital gain
When a stock is sold for a profit, it's the difference between the net sales price of securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.

Capital gains yield
The price change portion of a stock's return.

Capital lease
A lease obligation that has to be capitalized on the balance sheet.

Capital loss
The difference between the net cost of a security and the net sale price, if that security is sold at a loss.

Capital market
The market for trading long-term debt instruments (those that mature in more than one year).

Capital market efficiency
Reflects the relative amount of wealth wasted in making transactions. An efficient capital market allows the transfer of assets with little wealth loss.

Capital market imperfections view
The view that issuing debt is generally valuable but that the firm's optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of asymmetric information, asymmetric taxes, and transaction costs.

Capital market line (CML)
The line defined by every combination of the risk-free asset and the market portfolio.

Capital rationing
Placing one or more limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital budget.

Capital structure
The makeup of the liabilities and stockholders' equity side of the balance sheet, especially the ratio of debt to equity and the mixture of short and long maturities.

Capital surplus
Amounts of directly contributed equity capital in excess of the par value.

Capitalization method
A method of constructing a replicating portfolio in which the manager purchases a number of the largest-capitalized names in the index stock in proportion to their capitalization.

Capitalization ratios
Also called financial leverage ratios, these ratios compare debt to total capitalization and thus reflect the extent to which a corporation is trading on its equity. Capitalization ratios can be interpreted only in the context of the stability of industry and company earnings and cash flow.

Capitalization table
A table showing the capitalization of a firm, which typically includes the amount of capital obtained from each source - long-term debt and common equity - and the respective capitalization ratios.

Capitalized
Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives greater than one year.

Capitalized interest
Interest that is not immediately expensed, but rather is considered as an asset and is then amortized through the income statement over time.

Complete capital market
A market in which there is a distinct marketable security for each and every possible outcome.

Authorised capital
The maximum amount of share capital that a public limited company or a private limited company can issue according to its articles of association. Part of the authorised capital can remain unissued.

Basel II (Basel Capital Accord)
Basel II - short for the new Basel Capital Accord - lays down new guidelines for determining the minimum solvency requirements for banks. The main change in these guidelines is a new system for weighting the risks run by banks in their loans to retail and corporate customers. The objective of Basel II is to improve the soundness of the financial system.

Capital coverage ratio
Available capital divided by required capital.

Risk-adjusted return on capital (RAROC)
Measures performance on a risk-adjusted basis. Calculated as the economic return divided by economic capital. RAROC helps determine if a company has the right balance between capital, returns and risk. The central concept in RAROC is economic capital: the amount of capital a company should put aside needed based on the risk it runs.

Flight Capital
Money that flows offshore and likely never returns. Flight is exacerbated by a lack of confidence as government grows without bounds.

Risk Capital
Money put up by ordinary shareholders, an individual entrepreneur or venture capitalist that will be lost if the enterprise fails.

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Value-added tax

Value-added tax (VAT) is a method of indirect taxation whereby a tax is levied at each stage of production on the value added at that specific stage.


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