cost of capital
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Cost of capital
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.
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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
cost of capitalthe 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.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson
cost of capitalthe 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.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005