Cost of Capital joy

Reply to the students responce in 150 words with 1 reference

5. What is cost of capital and why it is important?

            The cost of capital is the opportunity cost of making specific investments within the firm and is the required return for capital budgeting such as building a new manufacturing plant.  This usually constitutes the weighted average of the company’s debt and equity costs blended together.  This is important because it represents a hurdle rate that a firm must overcome before the company can actually generate any revenue.  Accountants use this method to determine the value of investing in a project within the business in order to ensure that the investment will result in a return that exceeds the cost of capital.  Therefore, the cost of capital is very critical in deciding the risk of the firm’s equity for investment.

Kenton, W.  (2019).  Cost of Capital Definition.  Retrieved from https://www.investopedia.com/terms/c/costofcapital.asp