cost of capital

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The rate of return an enterprise has to offer to induce investors to provide it with capital. The cost of loan capital is the rate of interest that has to be paid. The cost of equity capital is the expected yield needed to induce investors to buy shares. When a firm uses both methods of raising capital, its cost of capital is the average of the costs of capital raised by the two methods, weighted by the proportion of funds raised in each way. The cost of capital depends on the apparent riskiness of the purpose for which it is to be used, the collateral offered for any loans, and the overall financial soundness and reputation of the borrower.

Subjects: Economics.

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