Figuring the cost of capital generally includes some weighty considerations of the "present value" of an investment versus its potential values in the future. Additional factors like relevant insurance can make cost of capital estimates a real crow's nest of data. Businesses will want to get as knowledgeable as possible about all of their investments, and that can be a time-consuming task.

For a little short cut in learning about cost of capital, turn to the web for detailed resources on how cost of capital valuations are going on in your industry and others. Business decision-makers can find a range of timely articles that will outline how others pursue cost of capital calculations within different financial scenarios. Use cost of capital news and trends sources:

1. For charting the future of a very new investment that can be valued according to its "strings attached" where cost of capital provides your "crystal ball" for future decisions.

2. For on-going monitoring of existing investment structures and held assets that are insured or otherwise "hedged."

3. For general learning for staff that will be going out in any kind of consulting or educating role to clients.

Action Steps
The best contacts and resources to help you get it done

Find news sources on cost of capital from online periodicals

One way to figure out what's going on with cost of capital is by reading up on the phenomenon in handy online magazines and journals. The articles prominently featured in these can be a barometer for action in your particular industry or beyond. Take care to look critically at any details on insurance, promissory notes or attached values that can tell you more about how cost of capital is tallied.

I recommend: Use the American Finance Association's Journal of Finance to get handy resources on figuring and identifying cost of capital in various situations (may require registration). Get more from online "magazines" like the Houston Business Journal.

Use government resources for figuring out cost of capital situations

Another way the web can help is by showcasing the work of some of the most influential associations and agencies out there, including those attached to the U.S. government. As government grows more and more relevant to a corporation's financial situation, '.gov' resources can show a business how the industry is changing, albeit sometimes very quickly.

I recommend: Find out about some cost of capital estimations for non-profits in the health care industry with articles like this one from Health Services Research, a resource of the U.S. National Institutes of Health (NIH). Learn about a cost of capital approach within a public service arena from this info page from the Energy Advisory Committee.

Look for more on cost of capital from public business pages

Other consultants, agencies, management experts and others can get you more on the general cost of capital methodology through online pages that are worth a read for anyone looking into cost of capital reckoning.

I recommend: Get cost of capital charts and more from BizManualz: "Policies, Procedures and Processes." Get background on cost of equity and similar arrangements at 12Manage. Or find news and consulting on cost of capital from sources like The Brattle Group online.

The cost of capital is the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. The rate of return (ROR) charged by the investor consists of interest with no risk, inflation and a risk premium added to the interest rate.

For example, for the payer of a promissory note, the cost of capital is the interest rate printed on the note. If an investor offers to buy the remaining payments, he/she will discount it by offering less than what is owed. This lowers the present value (PV) with a resulting increase in the interest rate in a time value of money (TVM) calculation. This increased interest rate (aka discount rate) is now the cost of capital incurred by the note seller, due to the investor's assessment of the risk or profit requirement. Before entering into one of these agreements, you should:

1. Retain a cost of capital consultant to perform thorough cost of capital calculations for your investments.

2. Have a cost of capital adviser compare the cost of capital between a variety of investment alternatives.

3. Prepare yourself and your staff with cost of capital training.

Action Steps
The best contacts and resources to help you get it done

Seek expert help in cost of capital matters from a cost of capital consultant

Cost of capital can sometimes be complicated to calculate. In its simplest form, it's the interest rate in a TVM calculation. But in its most robust form, it takes into account all components in the overall capitalization of the firm and is also affected by fluctuations in the prices of common stocks and by fluctuations in the future prospects of the firm. So, for a cost of capital calculation that takes your whole business into account, seek the services of a professional financial consulting firm.

I recommend: C.H. Guernsey has economists and financial experts that provide cost of capital and other financial consulting for engineering firms, architects and construction companies. Brown, Williams, Moorehead & Quinn are professional consultants on determining the cost of capital.

Obtain professional cost of capital advice for your investments

A financial adviser can be very helpful by employing various calculations like cost of capital to a set of investment choices and providing you with a cost/benefit comparison between choices so that you can make an informed decision.

I recommend: BDR North America has years of experience in regulated electricity and natural gas utilities and offers professional advice on cost of capital and in numerous other financial categories. Northington Partners is an investment banking firm and offers professional advice for all cost of capital matters for a wide variety of industries.

Arrange cost of capital training for yourself and your staff

As an alternative to seeking help with cost of capital, you can get yourself or your staff trained or refreshed on how to arrive at the cost of capital or weighted average cost of capital figures for investments your company is considering.

I recommend: Business Valuation Resources provides training on cost of capital through their book "Cost of Capital, Applications and Examples" and through training teleconferences and live training events. The New York Institute of Finance offers an online training course on the weighted average cost of capital.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Cost of capital information is one of three factors in determining the minimum attractive rate of return (MARR) to require of an investment. To determine the MARR, you should look at the cost of borrowed money, the cost of capital and the opportunity cost and then go with the highest of the three.

The cost of capital is a representation of the risks associated with any business investment. These costs are assumed to attract the necessary capital for a business to conduct day-to-day operations. Cost of capital models are used in order to determine the cost that a business will need to assume. There are many models to choose from in order to measure this risk. The model is also able to determine the required compensation to owners and investors for taking the risk.

Action Steps
The best contacts and resources to help you get it done

Arbitrage pricing theory model (APT)

The arbitrage pricing theory model helps to identify assets or shares that are not priced correctly according to the market. This model brings the price back to the actual value of the asset or stock.

I recommend: Money-Zine provides information on the APT model, formulas to determine the price and a comparison of APT and CAPM theories.

Build-up cost of capital model

The build-up cost of capital model builds up the discount rate to determine the risk assumed for operation of the business as well as the rate of return that is risk-free.

I recommend: ValuAdder provides information on how to build up the discount rate to apply a business valuation model.

Capital asset pricing model (CAPM)

The capital asset pricing model is a cost of capital model that splits risk into two categories: specific and systematic. Specific risk includes risk that is unique to the particular asset. The systematic risk is any risk brought on by the asset being a part of the general market.

I recommend: The Risk Glossary provides the history of the CAPM model and how to determine risk with this model.

Discounted cash flow model

The discounted cash flow model is a method that uses a concept of time value of money to determine future cash flows at present values with a discount rate.

I recommend: Value Based Management provides an overview of the discounted cash flow model and examples of how it works.

Fama-French three factor model

The Fama-French three factor model is builds on the CAPM model by using additional factors to determine the return rate, risk-free return rate and the return of the whole market.

I recommend: Money Chimp provides an in-depth explanation of the Fama-French three factor model.

Capitalization rate

A capitalization rate helps determine a business valuation through a specific equation. This rate, along with many other business valuation rates, is used to create cost of capital models.

I recommend: Intellectual Property Analysis provides information on the difference between the capitalization rate and the discount rate in financial modeling.

The cost of capital refers to the premium you must pay in order to attain capital to run your business. If you take money off a credit card to finance your business, then the interest you pay is your cost of obtaining your capital.

However, the principles of finance and calculating the cost of capital can become much more complicated once other factors and variables come into play. Taking the time to educate yourself in the principles of finance and calculating the cost of capital will help you enhance your business. Here are some resources where you can learn more about figuring the cost of capital.

1. Find reputable websites with articles that focus on cost of capital education and training.

2. Locate seminars that cover the cost of capital and other principles of finance.

3. Take a course in finance as part of your cost of capital education and training.

Action Steps
The best contacts and resources to help you get it done

Read articles dealing with cost of capital education and training

There are many reputable websites with informational articles that teach about the different ways to compute the cost of capital. Be sure these articles cover the variables relevant to your business. For instance if your business is financed with bonds, interest rates would be of prime importance when figuring your cost of capital equation.

I recommend: Visit the website for Teach Me Finance for an in-depth educational article about the cost of capital. Washington State University also has an article regarding how to compute the cost of capital.

Take a seminar which delves into the cost of capital and how it affects business

No matter what kind of business someone is in, the cost of capital is one of the major factors in helping a business grow. Take financial seminars geared toward the cost of capital and return on investment. This will allow you to streamline your operation and calculate how to make the most money from the capital you are borrowing.

I recommend: Visit the Intelligent Resources website, which offers a Return on Investment seminar covering calculating and dealing with the cost of capital. In order to figure the return on investment, one must have a handle on the cost of capital. The University of Iowa also offers seminars that focus on economic terms and their use in business including cost of capital.

Take a college level finance course that covers cost of capital

Learning how to calculate the cost of capital will be covered when taking most basic finance courses. Even if you are not seeking a degree in finance, taking a basic level course will help enhance your understanding of the basic principles, which can then be applied to your business. Locate a college or higher education class near you that covers finance.

I recommend: Visit the website for National Paralegal College for more information on taking an online course that covers calculating the cost of capital. Also, Santa Clara University has finance courses that include calculating business valuation tools such as cost of capital.