what is cost of capital and why does a firm care about it?
| Cost of capital refers to the opportunity cost of making a specific investment. It is the rate of return | |||||||||
| that could have been earned by putting the same money into a different investment with equal risk. | |||||||||
| Thus, the cost of capital is the rate of return required to persuade the investor to make a given investment. | |||||||||
| Cost of capital is an important component of business valuation work. Because the firm | |||||||||
| expects his investment to grow by at least the cost of capital, cost of capital | |||||||||
| can be used as a discount rate to calculate the fair value of aninvestment's cash flows. | |||||||||
| Cost of capital is the required return necessary to make a capital budgeting project. | |||||||||
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