Blends equity and debt costs into a hurdle rate for projects and valuations.
Published: 2025-12-20
Definition
Cost of capital is the blended rate a company must pay to use investors’ money, combining the expected return on equity and the after-tax cost of debt, weighted by their proportions.
Why it matters
It sets the hurdle for investing in projects and for valuing cash flows; higher risk or leverage raises the hurdle and lowers present value.
Where to apply it
Use it as a discount rate when evaluating earning power or DCFs; in asset-based cases, ensure expected returns exceed this cost, or the asset-backed margin of safety must be large enough to compensate.