Cost of Capital

Cost of capital is the return a company must earn on an investment to satisfy the people who fund it. It can refer to one source, such as equity or debt, or to the blended rate across all sources, which is the weighted average cost of capital.

Each source has its own cost. Shareholders might require 11% and lenders 6% before tax, and the blend for a 60/40 mix comes to about 8.5% after tax. Finance texts write these as Ke for equity and Kd for debt, which explains why cost of equity is written as Ke.

Cost of capital sets the bar for new projects, which is why it often becomes a company's hurdle rate and the discount rate in valuations. See the cost of debt entry and the cost of equity and WACC guide.