Q. What do you signify by Cost of Capital?

What do you signify by 'Cost of Capital'? What is its meaning and what are the problems in determination of cost of capital?

Ans. Meaning of Cost of Capital: - Cost of capital of a definite is the minimum rate of return expected by its investors. The capital utilized by a firm may be in the form of preference shares, equity shares, debts and retained earnings. The cost of capital is the weighted average cost of these resources of finance used by the firms. The perception of cost of capital occupies a very important role in financial management because the investment decisions are based on it.

Definition:-

As-per to Milton H. Spencer 'The cost of capital is the minimum rate of return which a firm needs as a condition for undertaking an investment.'

As-per to the M.J. Gordon

'The cost of capital is the rate of return a company should earn on an investment to maintain the value of the company.'