Charlie Munger & Warren Buffett - Cost Of Capital - April 28, 2001

[@mathias3026]

I would say that I agree with munger here. The cost of loans is very meaningful. The interest rate tells you how much it costs to borrow it. Hence "cost of (borrowing) capital". However the modern theory teaches that the "cost of capital" for the equity portion is measured by the returns on the equity. But as munger says, what is this "cost"? The equity is not costing anything in the way loans are..

[@QQQQQman]

Cost of capital. Isn`t that the same thing as the discount rate? I have a $90.91 today which at 10% interest is worth $100 in a year assuming zero inflation. Put another way $100 payable a year from now has a present value (PV) of $90.91 given a discount rate of 10%. Lower the discount rate by half and the PV becomes $95.24. I`m reminded that the validity of the CAPM is 7%. 93% of the time it is wrong.

[@stephenshb]

Cost of capital according to Buffett/Munger is what could be produced by your 2nd best idea (opportunity cost).