The Law Dictionary

Your Free Online Legal Dictionary • Featuring Black’s Law Dictionary, 2nd Ed.

COST OF CAPITAL Definition & Legal Meaning

Definition & Citations:

The total costs a firm bears in funding its operations through DEBT and EQUITY, equal to the rate of return needed to induce CAPITAL suppliers to invest or lend. The cost of capital is widely used for investment, reinvestment, financing, and capital budgeting decisions, and can be computed through: where rD is the average cost of debt, TR is the corporate tax rate (where 1 TR provides benefits in the form of a TAX SHIELD), rE is the average cost of equity (or expected return to COMMON STOCK shareholders), D is total amount of debt and E is total amount of equity.

Disclaimer

This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.