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Explicit Cost
A business expense that is easily identified and
accounted for. Explicit costs represent clear,
obvious cash outflows from a business that
reduce its bottom-line profitability. This
contrasts with less-tangible expenses such as
goodwill amortization, which are not as clear
cut
regarding
their
effects costs
on a business's
Good
examples
of explicit
would be items
bottom-line
value.
such as wage
expense, rent or lease costs, and
the cost of materials that go into the
production of goods. With these expenses, it is
easy to see the source of the cash outflow and
the business activities to which the expense is
attributed.
Cost of Capital
The cost of funds used for financing a business. Cost
of capital depends on the mode of financing used it
refers to the cost of equity if the business is financed
solely through equity, or to the cost of debt if it is
financed solely through debt. Many companies use a
combination of debt and equity to finance their
businesses, and for such companies, their overall cost
of capital is derived from a weighted average of all
capital sources, widely known as the weighted
average cost of capital (WACC). Since the cost of
capital represents a hurdle rate that a company must
overcome before it can generate value, it is
extensively
used in capital
the capital
budgeting
process to
The
cost of various
sources
varies from
determine
theand
company
should
proceed
with
company towhether
company,
depends
on factors
such
as
a project.
its
operating history, profitability, credit worthiness,
etc.
Operating Cost
Expenses associated with administering a
business on a day to day basis. Operating costs
include both fixed costs and variable costs.
Fixed costs, such as overhead, remain the
same regardless of the number of products
produced; variable costs, such as materials,
can
vary according
how
much
is
Businesses
have to to
keep
track
of product
both
produced. costs and costs associated with nonoperating
operating activities, such as interest expenses
on a loan. Both costs are accounted for
differently in a company's books, allowing
analysts to see how costs are associated with
revenue-generating activities and whether or
Opportunity Cost
1. The cost of an alternative that must be forgone in
order to pursue a certain action. Put another way, the
benefits you could have received by taking an
alternative action.
2. The difference in return between a chosen
investment and one that is necessarily passed up. Say
you invest in a stock and it returns a paltry 2% over
the year. In placing your money in the stock, you gave
up the opportunity of another investment - say, a riskfree government bond yielding 6%. In this situation,
your opportunity costs are 4% (6% - 2%).