The Significance of the Cost of Capital for the Firms - Essay Example

The third chapter is about the determination of the cost of capital parameters. The chapter broadly analyzes the parameters of the cost of capital. The fourth chapter provides an impairment test on the cost of capital for the various firms. The outlook of the cost of capital is the fifth chapter, the sixth chapter discusses the industry analysis since different industries have different costs of capital (KPMG, 2013).

The article is entitled, "Cost of Capital Study 2013." The author of the article is one of the leading accountancy firms in the world, KPMG, formed in 1987 after Klynveld Main Goerdeler (KMG) and Peat Marwick International (PMI) and their member firms merged. Since its merger, the company has spread rapidly across different countries and operates in various sectors (KPMG, 2013). They offer accountancy services to their clients. Financial consultancy services are among their products; the Cost of capital is among the many articles authored by KPMG. The article was released at the end of the year 2013, and it has helped clients in understanding more about the cost of capital, the parameters of the cost of capital, and making a forecast for the same.

The chapters of this article are well organized since they provide the theoretical point of view and the practical part of it. The article in chapter three, for instance, gives a theoretical overview of the various parameters of the cost of capital. Chapter six, on the other hand, provides industry analyses of the cost of capital. Some of the industries that the articles discussed include the automotive, chemical, pharmaceutical, and energy sectors. Some of the facts which the article provides include the fact that the cost of debt exhibited a significantly stronger decrease, dropping from 5.4% in 2012 to 4.4% at the end of 2013, for most of the industries under study (KPMG, 2013).

The article also states that a majority of firms determine their capital structures, cost of equity, and cost of debt from a peer group for both the value being used and the fair value less the cost of disposal.
Chapter three talks about the determination of the cost of capital parameters; whereby an overview of the Weighted Average Cost of Capital (WACC) has been provided. WACC is one of the parameters discussed in the text under study. It provides the average cost of capital in case the company is financing its operations with debt and equity. Chapter Six gives an overview of the cost of capital across the various industries since different industries tend to finance their operations depending on the risks they face. Read More