Finance for Managers - GVP8 - 05-11-21 - module 7

The cost of capital would usually be based on the capital structure, and depending on the capital structure, the price of capital would increase or decrease. This phrase however states that the equity or debt financing of capital is based on the risk associated with that investment. An investment that is seen as riskier with higher amounts of liability, will have a higher cost of capital for the resources used for this investment. An investment that is safe, and will not carry much risk, will have a lower cost of capital for the company. Therefore, the cost of capital is not dependent on the source, but how the capital will be used, and the risk that comes with that investment.