Cost of capital

KAKA A TAIFA

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[h=1]cost of capital[/h]The opportunity cost of an investment; that is, the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. For example, when an investor purchases stock in a company, he/she expects to see a return on that investment. Since the individual expects to get back more than his/her initial investment, the cost of capital is equal to this return that the investor receives, or the money that the company misses out on by selling its stock.
 
This is the rate of return that a firm would receive if it invested in a different vehicle with similar risk.

The cost of capital is a term used in the field of financial investment to refer to the cost of a company's funds (both debt and equity), or, from an investor's point of view "the shareholder's required return on a portfolio of all the company's existing securities" It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
 
so we need to compute the component cost/specific cost of each.source of finance
 
What is the difference between cost of capital and required rate of return? Between the two, which is used as a discounting factor when evaluating project's NPV?
 
Rejao said:
What is the difference between cost of capital and required rate of return? Between the two, which is used as a discounting factor when evaluating project's NPV?
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It is the same as to say what is the difference between product cost and its price in normal business like merchants,which is the profit, premium, income, return..
 
Cost of capital enable the firm to design a debt policy,as the result of that it help to determine the risk profile of the fim.
Question
Why do you think the cost of common equity sometime can be greater than the cost of retained earnings while the same formula is applicable to both?
 
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