cost of capital

Cost of Capital

The required return necessary to make a capital budgeting project worthwhile, such as building a new factory. Cost of capital would include the cost of debt and the cost of equity.

Notes:

The cost of capital determines how a company can raise money (through a stock issue, borrowing, or a mix of the two). This is the rate of return that a firm would receive if they invested their money someplace else with similar risk.

See also: Capital Budgeting, Cost of Equity, Opportunity Cost, Risk, Weighted Average Cost of Capital

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Cost of capital

The required return for a capital budgeting project.

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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.