The price of capital: essence, methods of determination, purpose and scope of use

Capital, in the economic sense, implies not only the result of financial and economic activity, but also an independent object, a means for increasing surplus value. That is, the expression "money makes money" can not be exactly used to determine capital. Like any means to generate income, capital has its value. The price of capital is determined by a number of factors and financial indicators.

This term is understood as the investor's expected level of income from investing his financial assets. In other words, the price of capital is the level of income from the placement of capital investments, expected by the investor for a certain period of using the money, with the same level of investment risk.

As can be seen, the cost of capital is influenced by such factors as:

- the size of the return on alternative investments. It is always accepted to compare the expected level of return on investment with the average interest rates on time deposits, commercial banks in the region;

- the amount of investment risks. After all, according to the canons of economic theory and financial management, the banking sector has the lowest risk of placement of funds, and accordingly - the lowest level of profitability of investments. The higher the level of investment risk, the higher the price of capital. Therefore, those who want to quickly make a lot of money risk more than investors who preferred a small but stable and guaranteed income from their investments.

Entrepreneurship itself has different types of profitability. Depending on the choice of the type of financing, the price of capital also depends. For example, illegal or limited types of entrepreneurship guarantee income from investments, several times higher than the amount of capital investment. But the level of risk is prohibitively high, because even criminal punishment can threaten. Legitimate entrepreneurial activity brings stable long-term income, but in smaller amounts.

The weighted average price of capital is determined as a percentage of the investment value, taking into account the time of investment, and is called a discount. The procedure for calculating it is similar to calculating the bank interest rate, which, in fact, is also a discount from investment in the banking sector by transferring the rights to manage its financial assets to a professional participant in the financial market - a banking institution.

Professional market players - financial institutions (banks, insurance companies, mutual funds, credit unions and others) accumulate money from investors (investors), from which they form portfolios, where the price and capital structure are the classifying sign . In addition to financial institutions, investors can be individuals, businesses and their owners. The price of the capital invested by them differs in its defining characteristics: time, magnitude and risks.