Capital costs is a term of the management economics and describes costs, which result to an enterprise from the fact that it procures itself for investments outside capital or own capital funds. In practice enterprises evaluate their business activities often thereafter whether the gained yield is sufficient, in order to cover the capital costs necessary for it.

Outside capital costs

Outside capital costs are the costs, which the enterprise must pay to Kreditinstitut or an other outside capital giver, above all thus interest costs of credits. These costs are usually contractually regulated and well-known.

Own capital funds costs

Expect also the own capital funds givers, thus for instance the shareholders of a corporation, that their plant yields interest. Own capital funds are served however from the Residualeinkommen, i.e., the shareholders receive the part of the profit, which remains remaining after departure of all other costs (also the outside capital costs). Thus firm interest charges cannot be guaranteed or calculated safe in the Vorhinein. The factor of uncertainty leads to the fact that due to the risk premium the own capital funds costs lie usually more highly than the outside capital costs.

For the determination of the own capital funds costs as factor a calculatory interest rate comes to carrying, since the shareholders do not receive for instance firmly agreed upon interest to a quoted finance company, but dividends and the increase in value of its portions.

Capital costs as control instrument

If an enterprise cannot offer appropriate interest charges to its own and outside capital givers, it is not in the long term competitive. Therefore each enterprise in its business activity must gain the capital costs at least. For each investment the capital costs thereby form the determined minimum net yield for investments.

Capital costs in accounting

In external accounting, approximately after IFRS/IAS, capital costs are activatable (right to vote), if it concerns a so-called "“qualified fortune article"”. So for instance the supply interest with the tangible assets can be activated, if the production of the plant takes a longer period up.

Weighted capital costs/Weighted AVERAGE Cost OF Capital (WACC)

Computation of the capital costs of an enterprise weighted after own capital funds and outside capital portion. In the WACC all sources of capital are seized, like loans e.g. spent, shares etc. The WACC is computed, weighted by the sum of the multiplication of each capital component after their respective portion of the total capital.

WACC=E/V * RH + D/V * RD * (1-tax)

with:

• RH = own capital funds costs
• RD = outside capital costs
• E = market value of own capital funds
• D = market value of the outside capital
• V = E + D
• E/V = portion of own capital funds
• D/V = portion of the outside capital
• Tc = control item

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