Question

Explain the concept of ‘Cost of Capital’? Discuss and describes how the cost of capital is calculated for
each individual component of capital. Discuss the factors influencing the pattern of capital structure

05 Aug 2026
Answer :
Word Count : 856
The cost of capital is the minimum rate of return that a firm must earn on its investments to satisfy the expectations of investors and creditors. It represents the opportunity cost of using funds in a business and serves as a benchmark for evaluating investment proposals. If a project generates a return greater than the cost of capital, it adds value to the firm; otherwise, it may reduce shareholders' wealth. The cost of capital plays a vital role in capital budgeting, financial planning, valuation of firms, and determining the optimal capital structure. A business generally raises funds from different sources such as equity shares, preference shares, retained earnings, and debt. Each source has its own cost, and the overall cost of capital is determined by combining the costs of these individual components according to their proportion in the capital structure. The cost _________ _______ _________ _________ ____ ______ ____ ____ ___ _____ _______.
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