The rate of return that a company must earn to compensate its equity and debt holders. The cost of capital is related to the marginal interest rate that the company must pay on its borrowed funds and the implicit cost of capital raising (dividend promised in relation to the money contributed by the new shareholder). When analyzing a new investment, the present value of the cash flow generated by it, discounted at the cost of capital, must exceed the amount of the investment. The cost of capital also refers to the financial concept of the cost of investment or capitalization of facilities or vehicles. On the other hand, the cost of equity is the cost a company incurs to obtain financing through its own resources. It reflects the profitability requirements of individual or institutional investors for investing in a company’s equity and the risk they assume for doing so. The cost of equity is higher than the cost of debt due to the greater risk assumed by the investor compared to the lender.
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