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 ?
How does the current interest rate outlook and volatility of the stock affect the company's cost of capital?
For each asset and each type of business entity tax treatment, B-Tax computes the net present value of depreciation deductions per dollar of investment, z, and the cost of capital, [rho], given the entity level tax rate.
survey only to use as a standard for cost of capital estimation practices among some of the best firms.
Light and Warburton (6) also take issue with the notion that the opportunity cost of capital is a legitimate resource cost.
The research results in local papers and theses that REM impact on the cost of capital is less studied.
"Although the cost of capital is unchanged from the level set in 2009, a number of parameters upon which the cost is based have changed," explained TRA chairman Dr Mohammed Al Amer.
Because an entrepreneur must commit a significant fraction of his wealth to a single firm, the entrepreneur's cost of capital is readily affected by the company's total risk, correlation with risk of the entrepreneur's firm, and achievable diversification of his portfolio (Hall et al ; 2002).
Section two concerns the impact of insurance implementation on the cost of capital components with regard to both the cost and the volume perspective.
Based on the above reasoning, it is not difficult to show that the cost of capital enlarges or shrinks the pool of investors and the number of projects an economy can embark on, can be used as a criterion for choosing among potential funds sources and uses, and is recorded in the numerator when estimating the cash flows.
This study investigates investor reaction to distribution changes using the implied unit cost of capital as an inverse measure of valuation in this sector of the Canadian market place.
1 Prepare a presentation for Williams regarding the concept of a firm's weighted average cost of capital (WACC).
Capital management is comprised of three basic components: the cost of equity, the cost of debt, and the weighted average of the costs of these two capital sources, known as the weighted average cost of capital (WACC).