How can one estimate the cost of financing with cash?

• A. By calculating the total equity value
• B. By considering the opportunity cost of forgone interest revenue
• C. By predicting future cash flows
• D. By evaluating market rates for debt

Answer: (B)

When estimating the cost of financing with cash, considering the opportunity cost of forgone interest revenue is crucial. This involves evaluating what returns could have been generated if the cash were invested elsewhere—like in interest-bearing accounts or other investment opportunities—rather than being used for financing purposes. The concept of opportunity cost is fundamental in finance, as it helps to assess the actual cost of using cash, which could have alternatively generated returns.

In this scenario, when cash is used for financing (rather than invested), the potential interest or returns that could have been earned on that cash are essentially 'lost.' Therefore, the opportunity cost becomes a vital component in understanding the true economic impact of using cash for financing, as it represents a real cost that affects overall financial decision-making.

Other options, while relevant in their own contexts, do not directly address the cost of using cash for financing in the same specific manner. For instance, evaluating market rates for debt focuses on borrowing costs rather than cash; predicting future cash flows is more about revenue forecasts than costs; and calculating total equity value does not pertain to the cost of using cash specifically.