Cost of Capital introduces to the opportunity cost of making a particular investment. It is the rate of return that could have been gained by putting the same money into a different investment with equal risk.
Costs of capital are a concept of vital importance in the financial decision marketing. It is useful as a standard for:
- Evaluating investment decisions:
The primary purpose of measuring the cost of capital is its use as a financial standard for evaluating the investment projects.
- Designing a firm’s debt policy:
The debt policy of a firm is significantly influenced by the cost consideration.
- Appraising the financial performance of top management:
The cost of a capital framework can be used to evaluate the financial performance of the top management.
- siring dividend policy:
Determination of percentage of dividend and proposed dividend become easy by analyzing cost of capital
- Determining the value of the firm:
The objective of financial management is wealth maximization. Cost of capital is the important element for valuation of firms and it plays a significant role in the case of valuation of firms.