CAPITAL STRUCTURE AND CAPITAL BUDGETING
COST OF CAPITAL
Cost of capital is an important concept. Many aspects such as long-term value of shareholders, rate of interest, exchange rate, derivatives, securities, etc. are directly or indirectly linked with it.
It can be defined as the minimum rate of return that a firm must earn on its investment, to keep the value (of equity shares) of a firm intact. It is not always a cost as such. It also represents the rate of return which the firm must pay to the suppliers of the capital for use of their funds.
This, as a rate of return, is calculated on the actual cost of different components of the capital. It is usually related to long-term capital funds.
In operational terms, the cost of capital may be defined ...
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