Explain in detail about the Cost of Capital
Every type of capital used by the firm (preference shares, debt and equity) must be incorporated into the cost of capital, with relative importance of a particular source being based on percentage of the financing provided by every source of capital. Using of the cost a single source of capital as hurdle rate is tempting to management, particularly when an investment is financed entirely by debt. Though, doing so is a mistake in logic and can cause problems.