IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789819825912_0008.html

The Cost of Capital

In: FOCUS ON FINANCE Everything You Need to Know About Financial Management

Author

Listed:
  • Ivan K. Cohen

Abstract

Possibly the most important concept in all of finance is valuation, in theory and in practice. Any stream of cash flows can be the subject of valuation. In previous chapters we made extensive use of Net Present Value for valuation purposes: for debt (Chapter 4), equity (Chapter 5), and (real) investment projects (Chapter 6). Calculation of NPV requires calculation of an appropriate discount rate, usually determined in the financial markets. To the provider of funds—the investor—the discount rate represents a required rate of return; to the corporation seeking funds, the discount rate represents its cost of capital, the cost of acquiring or using funds. Naturally, cost refers to opportunity cost. There are a number of ways of defining the cost of capital, including:The minimum return expected by an investor in order to remain in an existing investment (or be tempted into a new one)The minimum rate of return which the firm must earn on its new investments to cover its investment costs. It reflects the return which might have been earned from alternative investments of equal risk…

Suggested Citation

  • Ivan K. Cohen, 2026. "The Cost of Capital," World Scientific Book Chapters, in: FOCUS ON FINANCE Everything You Need to Know About Financial Management, chapter 8, pages 177-187, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789819825912_0008
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789819825912_0008
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789819825912_0008
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789819825912_0008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.