In order to appreciate the transportation cost of capital, it is important to understand what the cost of capital is and the elements that constitute the cost of capital. Cost of capital is the share’s rate of return and promissory commitments to business on the stock market. It is a measure of the minimum rate of revenue of capital investments and is required revenue of the corporation capital investments for budget planned to last longer time (Harrison, 2010). There are two types of cost of capital. One is the cost of equity to the business which is the rate of return that can be earned in a different place and the risk to the business that is taken into account. The other kind is the weighted average cost of capital in the business and constitutes the debt and equity of a business. The cost of capital is calculated to estimate how much interest the business has to pay for the capital borrowed. The components taken into consideration are the business’s equity value on the market, cost of debt, equity cost, and the corporate tax rate, the weighted average cost of all capital, the business’s debt value on the market, financing percentage on debt and financing percentage on equity. Therefore, the cost of capital describes the business’s real growth projection and its capital financial plan cutoff point (Bih.com).
Cost of capital is an all-inclusive and functional strategy for evaluating regulatory regimes, investment policies and transport pricing. Also, infrastructure investments and user costs are endogenously resolved for two contending alternatives (roads/rail and air) that may be used for freight and/or passengers transportation. Components are integrated one by one for the regulatory framework, equilibrium, supply and demand. Travelers can be divided into categories that vary according to their travel favorites, travel time expenses and revenues. Transit traffic and local traffic are two types of freight transport. Contractual types are factors to be considered when allowing for investment, maintenance and operating costs. The symmetry component works out a fixed-point answer in provisions of prices and degrees of congestion if the demand and supply functions are available. In short, the exogenous regulatory framework lays down the environment of rivalry, course of actions related to procurement, the utilization of transport tax incomes and resources, the cost of capital and the purpose functions of the infrastructure managers and operators considered in the objectives of private and public domains (Palmer, Lindsey, Proost & Loo, 2005). If taken into account, the results emanating from quantitative studies also establish that for the transport sector— in areas where there is an environment of intermodal competition and environments where shorter contracts are often encountered and regulatory resolutions are less imperative than for utilities—the option of regulatory administration significantly influences the level of market risk a business copes with. This has significant consequences for the actions of regulatory groups (Alexander, Estache & Oliveri, 2000).
The cost of capital is different from the “user cost” which is a price indicator connected with capital services which gives a quantity assessment and the factors are: rate of return to capital, depreciation rate, discount, projected real asset price comparative to the broad price level (Harrison, 2010). In other words, the user cost of capital can be considered as the price that a healthy-performing market would get paid for an asset let out to a user by an owner of that asset (Baldwin & Gu, 2008).
Alexander, I., Estache, A., & Oliveri, A. (2000). A few things transport regulators should know about risk and the cost of capital. Utilities Policy, 9(1), 1-13. Web.
Baldwin, J., & Gu, W. (2008). An Evaluation of Alternative Methods of Estimating Capital Services. Micro Economic Analysis Division Statistics Canada. Web.
Bih.com. (2010). How to Determine Firm’s overall Cost of Capital: Learning to invest your money. Web.
Harrison, A. (2010). Cost of capital services and the national accounts. Web.
Palma, A., Lindsey, R.C., Proost, S., & Loo, V.S. (2005). Cost-benefit analysis of tunnel investment and tolling alternatives in Antwerp. New Economics Papers. Web.