To: Tomato who wrote (426 ) 10/18/1998 12:44:00 AM From: James Clarke Respond to
Another number you want to keep in mind is this. 9-11%. At the current level of interest rates, that is the minimum level of Return on Equity required of a business to be making money in an economic sense. Because that is the Cost of Equity. It is very difficult to see that equity has a cost. (Me included - I was an investment banker for 4 years without really understanding this concept - scary, right. Only when I started thinking about investing from the investor's perspective did I get it.) It is easy to understand the cost of Debt because you have to pay interest every year, but equity you just have to pay the dividend yield. So the cost of that equity is a very difficult concept for many investors and for many managements. You have to use the economic concept of opportunity cost - where could I earn on that equity capital if I invested it in another business with similar risk. Under that logic, the cost of equity becomes clearer.
