Conclusion

Abstract

All businesses and investment projects need capital to operate. However, financial capital — the money tied up in the business, is not free. A project’s cost of capital is the minimum expected rate of return the project needs to offer investors to attract money. Simply put, the cost of capital is the expected rate of return the market requires to commit capital to an investment. Thus, the cost of financial capital to a firm is the return the firm’s investors (debt and equity holders) receive from lending their savings to be used by the firm’s portfolio of investment projects.