What is the cost of capital?
Cost of capital is essentially another way to identify the opportunity cost that is associated with a given investment. In other words, the cost of capital has to do with the amount or rate of return that can be expected on the investment, in comparison to what would be realized by selling off the investment. Investors routinely consider the cost of capital when projecting the potential profits that may be made by choosing to invest in a given stock or bond issue. When an investor chooses to make an investment, there is usually an expectation that two specific events will take place. First, the investor will recoup the amount of capital initially used to purchase the bonds or stocks involved in the transaction. Thus, there is anticipation that the investor will not in fact incur a loss as a result of the acquisition. Generally speaking, investors do not invest in securities that offer little to no hope of recouping the initial investment, as this represents negative opportunity costs a
