Cost of Capital

Knowledge Center


Ensuring that all investments of a firm yield a higher return than the cost of capital. Explanation of Cost of Capital.


  1. Summary
  2. Forum
  3. Best Practices
  4. Expert Tips
  5. Resources
  6. Print

What is Cost of Capital? Description

The Cost of Capital is the amount, expressed as an annual percentage, that a firm must pay to obtain adequate funds.

Firms finance their operations by three mechanisms:

  1. Issuing stock (equity or preferred).

  2. Issuing debt (borrowing from a bank) .

  3. Reinvesting prior earnings (internal financing).

The significance to a business of its cost of capital is that it has to ensure that all investments it makes yield a Return, which is at least equal to the cost of capital. The return on capital must be greater than the cost of capital.

Calculation of Cost of Capital. Formula

The Cost of Capital is the weighted sum of the:

  1. Cost of Debt

  2. Cost of Preferred Stock

  3. Cost of Equity

To derive the Cost of Capital, each of its 3 components must be calculated first.

To calculate the Cost of Debt, multiply the interest expense associated with the debt by the inverse of the tax rate percentage, and divide the result by the amount outstanding. Be sure to include any transactional fees in the denominator (acquisition fees, premiums, discounts).

To calculate the Cost of Preferred Stock, simply divide interest expense by the amount of preferred stock.

Cost of Debt calculation + Cost of Preferred Stock calculation

Visit  the following page for more details on calculating the Cost of Equity.

Calculation Cost of Equity, Formula

Now that all of its three components have been calculated, they can be combined on a weighted average basis to derive the blended cost of capital for a firm.

This is done by multiplying the cost of each component by the amount of outstanding funding associated with it (see figure 2):

Cost of Capital calculation

Cost of Capital Forum
  How Inflation Affects Cost of Capital and Profitability
Inflation has positive effects in the liabilities ...
  Analysis of Capital Investments
Should a firm accept the independent projects d...
  Cost of Capital ( Equity Only)
We recently were required to calculate a charge in...
  Cost of retained earnings
My question is how to calculate cost of capital in...

Cost of Capital Special Interest Group

Special Interest Group

Cost of Capital Education & Events

Find Trainings, Seminars and Events

Best Practices - Cost of Capital Premium

Expert Tips - Cost of Capital Premium

Cost of Capital Usage

The cost of capital is applied for Capital Budg...
Usage (application): Cost of Capital application

Resources - Cost of Capital Premium

Introduction and Calculation of WACC and its Components

Establishes an initial understanding of:
- Co...
Usage (application): Initial Understanding and Calculation of WACC and Cost of Capital, Trainings, Workshops

Corporate Valuation for Businesses

Presentation that elaborates on corporate valuatio...
Usage (application): Corporate Valuation, Book Value, Market Value, Intrinsic Value, Fundamental Value, M&A, VBM, Fundamental Investing

Introduction and Summary of Interest Rate Swap

Explanation of Base Rate Swaps.
A swap is an ...
Usage (application): Initial Understanding of Interest Rate Swap

Cost of Capital Diagrams

Download and edit this 12manage PowerPoint graphic...
Usage (application): Capital Budgeting

News about Cost Of Capital Method


News about Cost Of Capital Calculation


Videos about Cost Of Capital Method


Videos about Cost Of Capital Calculation


Presentations about Cost Of Capital Method


Presentations about Cost Of Capital Calculation


Books about Cost Of Capital Method


Books about Cost Of Capital Calculation


More about Cost Of Capital Method


More about Cost Of Capital Calculation


Instead of the term (Weighted Average) Cost of Capital you often find its acronym: WACC.

Compare with Cost of Capital: Cost of Equity  |  WACC  |  Capital Asset Pricing Model  |  Internal Rate of Return

Return to Management Hub: Decision-making & Valuation  |  Finance & Investing

More Management Methods, Models and Theory

Special Interest Group Leader

You here

About 12manage | Advertising | Link to us | Privacy | Terms of Service
Copyright 2017 12manage - The Executive Fast Track. V14.1 - Last updated: 22-11-2017. All names tm by their owners.