Summary and Final Task
In this lesson, we took closer look at the process of raising capital, from venture capital to stocks to bonds. The world of corporate finance can get very murky very fast; and, in some ways, it's more of a legal practice than a business practice. Our focus was on understanding the various mechanisms that are used to finance energy projects and the implications of those funding mechanisms on overall project costs.
When we are looking at social decisions that involve common costs and benefits, the discount rate is usually more of a matter of debate than anything else. But when a business decision is involved (and that business is a for-profit entity), then there is a rhyme and reason behind the determination of the discount rate as the "opportunity cost" of its investors. There are many different types of investors in a typical firm or project, all of whom face different opportunity costs, so we will encapsulate these in a single number called the "weighted average cost of capital" (WACC). The WACC turns out to be the correct discount rate for a company or a project.
Reminder - Complete all of the Lesson 3 tasks!
You have reached the end of Lesson 3! Double-check the What is Due for Lesson 3? list on the first page of this lesson to make sure you have completed all of the activities listed there before you begin Lesson 4.