ECONOMICS

Detailed explanation-1: -The firm must earn a minimum of rate of return to cover the cost of generating funds to finance investments; otherwise, no one will be willing to buy the firm’s bonds, preferred stock, and common stock. This point of reference, the firm’s required rate of return, is called the COST OF CAPITAL.

Detailed explanation-2: -Numerous studies have shown that Cost of capital is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. It is the required rate of return on its investments which belongs to equity, debt and retained earnings.

Detailed explanation-3: -Cost of capital is the minimum rate of return or profit a company must earn before generating value. It’s calculated by a business’s accounting department to determine financial risk and whether an investment is justified.

Detailed explanation-4: -The rate of return on its existing assets that a firm must earn to maintain the current value of the firm’s ordinary shares is called weighted average cost of capital.