COST OF CAPITAL

INSTRUCTOR : MEHNAZ KHAN

Understanding Cost of Capital

• The concept of the cost of capital is key information used to determine a project's
hurdle rate.
• A company embarking on a major project must know how much money the project will
have to generate in order to offset the cost of undertaking it and then continue to
generate profits for the company.
• Cost of capital, from the perspective of an investor, is an assessment of the return that
can be expected from the acquisition of stock shares or any other investment.
• This is an estimate and might include best- and worst-case scenarios.

• An investor might look at the volatility (beta) of a company's financial results to

determine whether a stock's cost is justified by its potential return.
Weighted Average Cost of Capital (WACC)
What is the Cost of Preferred Stock?
The cost of preferred stock to a company is effectively the price it pays in return for the income it gets
from issuing and selling the stock. In other words, it’s the amount of money the company pays out in a
year divided by the lump sum they got from issuing the stock.