Cost of capital, Financial Management

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Q. Cost of capital?

The terms of cost of capital refers to the minimum rate of the return a firm must earn on its investment so that the market value of the company equity share fall. This is consonance with the overall object of the firm of wealth maximization. This is possible only when the firms earn the return on the project financed by the equity share holders at a rate which is least equal to the rate of the return expected by them . If a firms fail to earn the return at the expected rate the market value of the share would fall and thus result in reduction on overall wealth of the shareholders.

According to james : a cut off rate for the allocation of the capital to investment of the project . It is the rate of the return on a project that will leave unchanged the market price of the stock.

According to the Hampton: the rate of return of the firm require for the investment in order to increase the value of the firm in the market price.


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