Cost of Capital:
The rate of return available in the marketplace on investments comparable both in conditions of risk and other investment characteristics, such as marketability and other qualitative factors. A more practical definition is the following: the predictable rate of return an investor would wants to be induced to purchase the rights to future streams of profits as reflected in the business interest under consideration. Cost of capital is an integral element of the business evaluation procedure. However, it is determined by the market and is totally out of management's control. Cost of capital presents the degree of perceived risk by potential investors: the lower the perceived possibility, the lower the cost of capital.