Essentials of Financial Management, 5th Edition by Pearson

CHAPTER 10

Cost of Capital

LEARNING OBJECTIVES

• Explain the general concept of the opportunity cost of capital.
• Distinguish between the project cost of capital and the firm’s cost of capital.
• Learn about the methods of calculating component cost of capital, the weighted average cost of capital and the marginal cost of capital.

INTRODUCTION

The opportunity cost of capital (or simply, the cost of capital) for a project is the discount rate for calculating the present value of cash flows. The project’s cost of capital is the minimum required rate of return from the project, which depends on the riskiness of cash flows. Since the investment projects undertaken by a firm may differ in risk, each one of them will have its own unique cost of ...