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What is opportunity cost? As scarce resource, financial capital has opportunity cost. What determines the opportunity...

What is opportunity cost? As scarce resource, financial capital has opportunity cost.

What determines the opportunity cost of capital?

PLEASE ANSWER THIS QUESTION IN A ESSAY FORMAT!

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Expert Solution

Opportunity cost is the value of opportunity lost , It means the benefits an individual, business or investor misses out on when choosing one alternative on another.

For Example : Suppose you are buying Stock A & left buying stock B, so the value of stock B which we have have left to buying is known as opportunity cost. ( Benefit - Cost = Opportunity lost).

As Scarce resources,financial capital has opportunity cost. so we have to invest more money in financials (Debt + Equity). Cost of Debt & Cost of Equity determines the opportunity cost of capital. If we have to need opportunity cost in terms of fixed income security so we have invest in fixed securities just like Debentures, Bonds, Certificate of Deposits, Banks, leases, Promissory notes etc. and if we have to need opportunity cost in term of Non- Fixed income security so we have to invest in non-fixed securities like Equity, Mutual funds etc.

So if we have to get benefits of opportunity cost we have to go towards financial capital.

jeff jeffy answered 9 months ago
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