cost of capital


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Related to cost of capital: Cost of equity, Capital structure, Cost of debt

Cost of capital

Cost of Capital

The difference in return between an investment one makes and another that one chose not to make. This may occur in securities trading or in other decisions. For example, if a person has $10,000 to invest and must choose between Stock A and Stock B, the cost of capital is the difference in their returns. If that person invests $10,000 in Stock A and receives a 5% return, while Stock B makes a 7% return, the cost of capital is 2%. One way of conceptualizing the cost of capital is as the amount of money one could have made by making a different investment decision. Many companies calculate the cost of capital when deciding whether to issue stock or a bond, to determine which would be cheaper.

cost of capital

The overall percentage cost of the funds used to finance a firm's assets. Cost of capital is a composite cost of the individual sources of funds including common stock, debt, preferred stock, and retained earnings. The overall cost of capital depends on the cost of each source and the proportion that source represents of all capital used by the firm. The goal of an individual or business is to limit investment to assets that provide a return that is higher than the cost of the capital that was used to finance those assets.

cost of capital

the cost to a firm of the LONG-TERM CAPITAL used to finance its business activities. The average cost of capital to a firm which uses several sources of long-term funds (for example LOANS, SHARE CAPITAL (EQUITY)) to finance its investments will depend upon the individual cost of each separate source of capital (for example INTEREST on loans), weighted in accordance with the proportions of each source used. See CAPITAL GEARING.

cost of capital

the payments made by a firm for the use of long-term capital employed in its business. The average cost of capital to a firm that uses several sources of long-term funds (e.g. LOANS, SHARE CAPITAL (equity)) to finance its investments will depend upon the individual cost of each separate source of capital (for example, INTEREST on loans) weighted in accordance with the proportions of each source used. See CAPITAL GEARING, DISCOUNT RATE.
References in periodicals archive ?
It may come as a surprise to some people to know that there are various stocks in the market, including those in the PSE index that do not generate enough returns against its cost of capital.
The notion of the opportunity cost of capital is widely accepted within economics, although, as we discuss below, the methods used to estimate its value are contested.
The cost of capital set will ensure that licensed operators who have been found to have significant market power or dominance will be appropriately compensated for the capital costs that they face when making such investments," Dr Al Amer said.
Here, the two distinctive views should be underlined: the traditional concept concerning the weighted average cost of capital and a novel risk capital concept concerning the total average cost of capital.
The Role of Information Asymmetry on the Cost of Capital
Comparison of the unit cost of capital from the no-growth model indicates separation between trusts that increase, maintain or reduce their distributions.
The use of debt lowers the cost of capital because lower cost debt capital is substituted for higher cost equity capital.
The return boundary for starting the investment exceeds the cost of capital and the manager defers a timeable investment.
Analysts at the company said that the cost of capital is likely to increase for some UAE borrowers, even though credit problems are expected to be low in many parts of the UAE.
A survey of the literature shows that a large number of researches have been carried out in the area of capital structure and cost of capital.
1 Contrasting the external rate with the cost of capital rate
The purpose of this article is to illustrate how the cost of capital may be incorporated into CVP analysis.