Cost of Capital
Cost of capital is a term used to describe the cost of obtaining funds to finance a business. It is the rate of return that a company must pay to its investors for the use of their money. The cost of capital is used to evaluate potential investments and to determine the value of a business. It is also used to measure the performance of a company’s management in terms of how well they are able to generate returns for their investors.
History of Cost of Capital
The concept of cost of capital has been around since the early 1900s. It was first introduced by economist Irving Fisher in his book The Theory of Interest. Fisher argued that the cost of capital should be based on the opportunity cost of the funds used to finance a business. This means that the cost of capital should reflect the return that could have been earned if the funds had been invested elsewhere.
Since then, the concept of cost of capital has been widely used in finance and economics. It is used to evaluate potential investments and to determine the value of a business. It is also used to measure the performance of a company’s management in terms of how well they are able to generate returns for their investors.
Table of Comparisons
| Type of Capital | Cost of Capital |
|---|---|
| Debt | Interest Rate |
| Equity | Required Rate of Return |
| Preferred Stock | Dividend Rate |
Summary
Cost of capital is a term used to describe the cost of obtaining funds to finance a business. It is the rate of return that a company must pay to its investors for the use of their money. The cost of capital is used to evaluate potential investments and to determine the value of a business. It is also used to measure the performance of a company’s management in terms of how well they are able to generate returns for their investors.
For more information about cost of capital, you can visit websites such as Investopedia, The Balance, and The Motley Fool.
See Also
- Interest Rate
- Required Rate of Return
- Dividend Rate
- Weighted Average Cost of Capital (WACC)
- Capital Asset Pricing Model (CAPM)
- Discounted Cash Flow (DCF)
- Return on Investment (ROI)
- Internal Rate of Return (IRR)
- Net Present Value (NPV)
- Payback Period
