I don't understand the concept of cost of equity
I understand cost of debt, it's pretty straight forward, its just the interest rate on debt
However, I am confused about cost of equity and the actual cost of issuing equity. For example, if a company decides to issue 1 share at $100 and the cost of equity is 8%, how is the company losing 8 dollars from this? The only negative cash outflow I can see from this issuance is investment banking fees. Assuming the company DOES NOT issue dividends, and investors only benefit from stock appreciation, how does this cost the company? If the stock price appreciates from 100 to 120, this has no bearing on the company in terms of cash.
Cost of equity as it applies to DCFs has nothing to do with cash expense, the purpose is to find the risk premium on an equity so it can be priced into the discount rate.
The cost of equity describes the level of returns investors expect from an equity in compensation for the risk of that equity. This is used to discount future cash flows based on the risk ascribed to those cash flows by the market.
okay, but when we are having a discussion about which is cheaper for a company to issue, debt vs equity, I don't really understand why equity costs more assuming the company doesn't issue dividends.
A company can compensate its shareholders without paying dividends. They can repurchase shares, acquire new assets to grow, or other forms of investment.
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