Cost of capital is a term commonly used in the area of financial investments to assign the price of a fund of company, or the shareholder's required return. It is used to estimate new projects in a company because it is the least possible return that investors expect to make money for the company, thus setting a benchmark for a new project to be met. The cost of capital is particular for each capital company. The highest level of cost of capital is the cost of debt and cost of equity, but each class of shares and each class of debt have it's own cost.
Securities can be valued by using cost of capital, Since it is the appropriate discount rate which can be applied. For this reason, models that estimate the cost of capital, such as the CAPM and the arbitrage pricing theory, are said to called valuation models. Here the cost of capital of a security can be estimated from market price and future cash flows.
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Cost of equity
Cost of debt
Securities can be valued by using cost of capital, Since it is the appropriate discount rate which can be applied. For this reason, models that estimate the cost of capital, such as the CAPM and the arbitrage pricing theory, are said to called valuation models. Here the cost of capital of a security can be estimated from market price and future cash flows.
You might also like,
Cost of equity
Cost of debt
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