Define Cost of Capital

Cost of Capital introduces to the opportunity cost of making a particular investment. It is the rate of return that could have been gained by putting the same money into a different investment with equal risk.

Costs of capital are a concept of vital importance in the financial decision marketing. It is useful as a standard for:

  • Evaluating investment decisions:

The primary purpose of measuring the cost of capital is its use as a financial standard for evaluating the investment projects.

  • Designing a firm’s debt policy:

The debt policy of a firm is significantly influenced by the cost consideration.

  • Appraising the financial performance of top management:

The cost of a capital framework can be used to evaluate the financial performance of the top management.

  • siring dividend policy:

Determination of percentage of dividend and proposed dividend become easy by analyzing cost of capital

  • Determining the value of the firm:

The objective of financial management is wealth maximization. Cost of capital is the important element for valuation of firms and it plays a significant role in the case of valuation of firms.