Lecture No. 3 - Cost of Capital & Capital Structure
Lecture No. 3 - Cost of Capital & Capital Structure
Lecture No. 3 - Cost of Capital & Capital Structure
The cost of funds used for financing a business. Cost of capital depends on the mode of
financing used it refers to the cost of equity if the business is financed solely through equity, or
to the cost of debt if it is financed solely through debt. Many companies use a combination of
debt and equity to finance their businesses, and for such companies, their overall cost of capital
is derived from a weighted average of all capital sources, widely known as the weighted average
cost of capital (WACC).
Since the cost of capital represents a hurdle rate that a company must overcome before
it can generate value, it is extensively used in the capital budgeting process to determine whether
the company should proceed with a project.