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Cost of capital

The cost of capital of a firm is the minimum rate of return expected by its investors. The capital used by a firm may be in the form of debt, preferences capital. retained earning and equity shares. Hence, to achieve the objective of wealth maximization, a firm must earn a rate of return more than its cost of capital. Hence, the cost of capital to a company is the rate of return. It must earn its investments in order to satisfy the expectations of investor who provide long-term funds to it. Therefore, the firm's cost of capital will be the overall, or average, required rate of return on the aggregate of the investment projects.
Importance of cost of capital :
The following are the importance of significances of cost of capital
a) Financial standard : The cost of capital is used as a financial standard for evaluating the investment projects. To calculate Net Present Value, it is essential. So it is used for evaluating the desirability of the investment project.
b) Determination of capital mix : Financing the firm's assets is a very crucial problem in every business. There should be a proper mix of debt and equity capital in financing a firm's assets. So for this purpose, the management has to keep in mind the objective of maximizing the value of the firm and minimizing the cost of capital

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