This lesson examines the cost of capital, a critical element in financial decision-making.

4.1 Understanding the Cost of Capital
The cost of capital is the minimum return a company must earn on its investments to satisfy its investors and maintain its value . It reflects the opportunity cost of capital .

4.2 Components of Cost of Capital

• Cost of Debt: The required rate of return demanded by lenders, typically expressed as an interest rate .

• Cost of Equity: The return required by shareholders, representing compensation for the risk of investing in the company’s equity .

4.3 Weighted Average Cost of Capital (WACC)
WACC is a key element in valuation models and capital budgeting . It represents the overall required return for the firm’s investors .