Cost of capital

Cost of capital:

Cost of capital is the minimum or lowest rate of investment that a company has to earn for receiving fund.

Whenever any company investor invests his money, he observes the rate of return. Therefore company has to state, what will company pay, when investors give their money to company. That average cost on the investment is termed as cost of capital. We compute it with the following method:

Cost of capital = interest rate at zero level risk + premium for business risk + premium for financial risk

When a company has not power to earn and cost of capital, then this company can’t obtain fund from public.

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