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.

More On This Topic

Link to This Definition
Did you find this definition of COST OF CAPITAL helpful? You can share it by copying the code below and adding it to your blog or web page.
Written and fact checked by The Law Dictionary