Cost Of Capital : All you Need to Know
COST OF CAPITAL MEANING The cost of capital is the rate of return that a firm must achieve on its investment projects in order to maintain its market value and attract investors. It includes the required rate of return on investments in equity, debt, and retained earnings. Failure to meet this expected return might cause a drop in the company's share value and, eventually, lower shareholder wealth. The cost of capital is essentially the minimal return that investors demand in exchange for providing funding to the company, and it serves as a standard for evaluating new ventures. . According to various definitions by financial experts such as John J. Hampton, Solomon Ezra, James C. Van Horne, William, and Donaldson , the cost of capital represents the necessary rate of return that a firm must attain to increase its market value, the minimum required rate of earnings, or the cut-off rate for capital expenditure. Assumptions The assumptions underlying t...