Can someone please put into simple terms what cost of capital is and when a company turns a profit, where does that profit go? Apart from into the pockets of the CEO. For example sake, PG&E and how they justify increase rates.
Thank you!
In: 1
Cost of capital is a complicated formula that tries to calculate how much that $1 ‘costs’ the company, whether it’s their borrow rate, or the amount they could have made by investing that same $1 elsewhere.
Profits, by definition, do not go ‘into the pockets of the CEO’. CEO pay is part of SG&A, which is a line item above Net Profit.
Net Profits go to depreciation, amortization, interest, taxes, R&D, and – in the case of PG&E – long-term capital investments like power plants, substations, and the rest of the grid.
After these expenses, profits are shared between shareholders and possibly withheld by the company for future growth.
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