What is a capital fee?
Capital fee is a return that the project must realize to cover the cost of capital it uses. It is given in currency units rather than in percent. This number is based on the minimum yield that investors require in exchange using their funds. If the return on the project does not meet this minimum threshold, it may not be useful to make it, even if it can have positive revenues.
The capital fee depends on the return that investors expect in each class of capital. It is by multiplying the invested capital of the project by a percentage. This percentage is a weighted average of investors' expectations. The analyst must determine both these numbers before calculating the capital fee.
Invested capital consists of various capital sources. For example, if an investor buys shares from a company in an initial public offer, the purchase price of this shares contributes to the company's capital. This is called the Eqkapital Uity. The company can also sell bonds that create loans aboutD investors in the company, and this type of capital is debt capital. The total amount of invested capital can be found by taking the company's capital in its balance sheet and adjusting it so that it also shows capital that has not been reported there.
The percentage of the invested capital is called weighted average cost per capital or WACC. Each type of capital has different costs because investors treat each investment class differently. Analyst must determine the costs of each class and then create an average that is respected according to how many of the company invested the company comes from each capital class.
Debt costs can be easily determined because it is outlined by the company in reports of 10 K, which is given to the Securities and Stock Exchange Commission. You can also be approximated you see the evaluation of the company's debt that is assigned by an independent rating agency, and the evaluation withOvatable estimated debt costs. The cost of capital must be calculated on the basis of theory. For example, an analyst could use a formula prescribed by a model of capital assets to find a return that the asset would have to provide the investor to compensate him with the risk of him.
The capital fee is significant because it is used to calculate another financial concept called economic profit. This is a net operating profit after a tax or nop, a minus capital fee. It shows whether the project in question has sufficiently high revenues to enjoy investors.