Could you be more proficient than any of the Co-op's regional directors?

 
Peter Spence
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If there's a thread flowing through the Co-op Bank's problems - it's one of a skills deficiency.

Much of the bank's senior management seems to have shown an appalling lack of basic experience.

Speaking to the Treasury Select Committee today, Lord Paul Myners flags a neat example of this extensive failure.

While on the Co-op group's board, Myners asked the assembled regional directors of the group two simple questions. None could volunteer the answers.

So, would you have done better?

1. What is "cost of capital"?

The cost of funds used for financing a business.

2. How is it calculated?

We'll assume Myners was referring to calculating the weighted average cost of capital (WACC) for businesses.

You'd need to calculate each of the cost of debt capital and cost of equity capital components. Investopedia provides the means.

After-tax cost of debt = Yield to maturity of debt x (1 - T), where T is the company's marginal tax rate
Cost of equity = Capital Asset Pricing Model (CAPM) = Risk-free rate + (company's beta x risk premium).

The two components are then weighted to find the WACC we think Myners was asking for.