The cost of capital represents a business's expense to finance its operations, whether through debt from creditors or equity financing from investors. It includes both the cost of debt, which covers interest payments and the cost of equity, which reflects the returns shareholders expect on their investments.

This metric is a reference point for assessing potential projects by comparing the cost of securing capital with the expected returns. When taking on new projects, a company aims to earn a return that exceeds its cost of capital. For example, if a company's cost of capital is 8% but invests in a project yielding only 6%, the project underperforms and reduces company value. Conversely, a project with a 10% return increases value by surpassing the cost of capital.

Understanding and managing the cost of capital ensures efficient resource allocation. This allows a business to pursue projects that generate returns higher than financing costs, thus boosting profitability and shareholder value.

From Chapter 8:

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8.1 : Concept of Cost of Capital

Cost of Capital

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8.2 : Required Return vs. Cost of Capital

Cost of Capital

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8.3 : Cost of Equity

Cost of Capital

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8.4 : Calculating Cost of Equity

Cost of Capital

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8.5 : Cost of Preferred Stock

Cost of Capital

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8.6 : Cost of Debt

Cost of Capital

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8.7 : Calculating Cost of Debt

Cost of Capital

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8.8 : Weighted Average Cost of Capital

Cost of Capital

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8.9 : Calculating Weighted Average Cost of Capital

Cost of Capital

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8.10 : Capital Structure Weights

Cost of Capital

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