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What is Cost Of Capital?

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Cost of capital is the cost of a firm's funds including both equity and debt.

Cost of Debt

Cost of debt includes interest payments and fees for instruments such as lines of credit and bonds.

Cost of Equity

Cost of equity is based on market prices and reflects the expected rate of return of the company's investors. This is influenced by factors such as risk and the comparable rate of return offered by competing investments in the market.


Cost of capital is critical to the business strategy of a firm because investors expect a business to achieve a higher rate of return than cost of capital. For example, if a firm's cost of capital is 10%, a strategy that returns 8% will be viewed negatively. Additionally, any strategy that is perceived as risky will increase a firm's cost of capital as investors and bond holders demand a higher risk premium on their investments.
Overview: Cost Of Capital
The cost of a firm's funding including both equity and debt issues.
A company issues $1 Billion in equity. It is priced for an annual return of 11% based on the company's financial forecasts for the following year.
A large company with a high credit rating issues long term bonds that yield 5% per annum.
Related Concepts

Business Costs

This is the complete list of articles we have written about business costs.
Applied Cost
Business Equipment
Capacity Cost
Capital Improvement
Carrying Costs
Closing Costs
Cost Of Capital
Cost Of Revenue
Cost Of Living
Direct Cost
Distress Cost
Fixed Costs
Friction Cost
Employee Costs
Holding Costs
Intangible Cost
Marginal Cost
Operating Cost
Operating Expenses
Legacy Costs
Outlay Cost
Lifetime Cost
Overhead Costs
Menu Costs
Relevant Cost
Normal Costs
Sunk Costs
Tangible Cost
Operational Costs
Travel Expenses
Unit Cost
Opportunity Cost
Variable Costs
Prospective Cost
Semi Variable Cost
Step Costs
Switching Costs
Transaction Costs
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