Cost of capital is an essential economic and accounting tool that can maximize potential investments for businesses. It is the rate of return the firm expects to earn from its investment in order to increase the value of the firm in the marketplace. Sources of capital are usually in the form of equity share capital, preference share capital, preference share capital, debts and retained earnings. There are three capitals to the cost of capital, they are: zero risk return, premium of the business risk and premium of the financial risk. The cost of capital typically determines the rate of return required to persuade investors to finance a capital budgeting project. Cost of capital is judged internally by companies to determine if the resource expenditure is worth pursuing a capital project. Investors judge cost of capital to determine the risk associated with investing money into a capital project. It helps investors assess their options. It assists capital budgeting decisions since businesses must decide if a project is worthwhile before starting. It is essential for businesses to design the ideal capital structure of their firm.

Ananthu Sibi

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