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The cost of capital as the key to the value of the company

Pitera Rafał, Gnap Michał

Organizacja i Zarządzanie : kwartalnik naukowy

2021

nr 3

139--147

Introduction/background: The issue of company valuation is undoubtedly one of the very complex, poorly recognizable and controversial. Theories of estimating the cost of capital are characterized by high dynamics of development resulting from new experiences and challenges arising from the practice of valuation. It should be noted, however, that the application of the cost of capital in the practice of economic activity still leaves much to be desired. Aim of the paper: This work focuses on the theoretical aspects of the cost of capital and practical issues in terms of how it is determined in developed capital markets. Materials and methods: A company capital structure essentially – its blend of equity and debt financing – is a significant factor in valuing the business. In this research we demonstrated that the WACC method, generally reflects the return that hypothetical investors require. This work is conducted to bridge several methods: type of investment decisions, purpose of the capital, management plans. Results and conclusions: A company's capital structure fluctuates over time as the effect of change in equity securities and its debts. We believe it is appropriate to use optimal capital structure if the business environment activity temporarily has veered off of actual capital structure.