Cost of capital is an important component of accounting and financial analysis for a business. The cost of capital should be minimal for a business that successfully manages its finances. It is the minimum rate of return that a business must earn before generating value. When analysts and investors discuss the cost of capital, they typically mean the weighted average of a firm's cost of debt and cost of equity blended together. Before a business can turn into a profit, it must at least generate sufficient income to cover the cost of the capital it uses to fund its operations. This consists of both the cost of debt and the cost of equity used for financing a business. To calculate the weighted average cost of capital, you must first calculate the cost of debt and the cost of equity. It is an essential economic and accounting tool that can maximize potential investments for businesses. It assists capital budgeting decisions since businesses must decide if a project is worthwhile before starting. It can also be used to evaluate the performance of certain projects as compared to the cost of capital.

Rohit Senan C

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