Question

Costs of Capital vs Opportunity Costs

1. What connection do you think exists between the costs of capital and "opportunity costs?"
2. Why do you think firms don't list the costs of capital on their financial statements?
3. Who receives payment of capital costs?

Answer 1

Cost of capital vs opportunity cost

cost of capital is the return expected by providers of capital to business as a compensation for their contribution to total capital.In case of equity shareholders , dividend payable on equity share capital is the cost equity share capital.capital employed in business constitutes of equity share capital, preference share capital, retained earnings and long term borrowings.every source of capital has its own cost. then u may ask 'what is the cost of retained earnings?'.here is the relation between cost of capital and opportunity cost. The cost of retained earnings is the opportunity cost of dividend foregone by share holder.

usually firms do not list the cost of capital on their financial statements.because financial statements are prepare in accordance with relevant accounting standards and laws.moreover firms usually use weighted average cost of capital instead of list of cost of capitals.and usually cost of capital is relevant for managerial decision making.and cost of capital change with market conditions.

The cost of capital is received by providers of capitals such as equity shareholders, debenture holders, preference share holders etc.