Q1. What are the determinants of a company’s cost of capital?
A corporate cost of capital can be specifically defined as the opportunity cost of all capital invested in the enterprise. Opportunity cost refers to what is given up as a consequence of a decision to use a scarce resource, capital invested refers to the total amount of cash invested into a business, and this includes both debt and equity components used in the investment in the enterprise.

A three step process is used to calculate a company’s weighted average cost of capital.
First is to determine the cost of capital components, which is namely debt and equity.

A. Debt capital. The cost of debt capital is equivalent to actual or imputed interest rate on the company's debt, adjusted for the tax-deductibility of interest expenses. Specifically:
The after-tax cost of debt-capital = The Yield-to-Maturity on long-term debt x (1 minus the marginal tax rate in %)
B. Equity capital. Equity shareholders, unlike debt holders, do not demand an explicit return on their capital. However, equity shareholders do face an implicit opportunity cost for investing in a specific company, because they could invest in an alternative company with a similar risk profile. Thus, we infer the opportunity cost of equity capital.
We can do this by using the "Capital Asset Pricing Model" (CAPM). This model says that equity shareholders demand a minimum rate of return equal to the return from a risk-free investment plus a return for bearing extra risk. This extra risk is often called the "equity risk premium", and is equivalent to the risk premium of the market as a whole times a multiplier--called "beta"--that measures how risky a specific security is relative to the total market.
Thus, the cost of equity capital = Risk-Free Rate + (Beta times Market Risk Premium).
2. Capital structure. Next, we calculate the