Question

what is cost of capital and why does a firm care about it?

what is cost of capital and why does a firm care about it?

Homework Answers

Answer #1
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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