The Cost of Capital

Ivan K. Cohen

Chapter 8 in Focus on Finance:Everything You Need to Know About Financial Management, 2026, pp 177-187 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Possibly the most important concept in all of finance is valuation, in theory and in practice. Any stream of cash flows can be the subject of valuation. In previous chapters we made extensive use of Net Present Value for valuation purposes: for debt (Chapter 4), equity (Chapter 5), and (real) investment projects (Chapter 6). Calculation of NPV requires calculation of an appropriate discount rate, usually determined in the financial markets. To the provider of funds—the investor—the discount rate represents a required rate of return; to the corporation seeking funds, the discount rate represents its cost of capital, the cost of acquiring or using funds. Naturally, cost refers to opportunity cost. There are a number of ways of defining the cost of capital, including:The minimum return expected by an investor in order to remain in an existing investment (or be tempted into a new one)The minimum rate of return which the firm must earn on its new investments to cover its investment costs. It reflects the return which might have been earned from alternative investments of equal risk…

Keywords: Finance; Financial Management; Finance Theory; Corporate Restructuring; Financial Forecasting; Mergers and Acquisitions; M&A; Fintech; Central Bank Digital Currencies; Cryptocurrencies; Digital Finance; Valuation; Company Valuation; Corporate Restructuring; Pensions; Financial Markets; Financial Institutions (search for similar items in EconPapers)
JEL-codes: G11 G17 G30 G31 G32 (search for similar items in EconPapers)
Date: 2026
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