Definitions are well-referenced for accuracy,
Yet written originally in understandable terms.
Ofterms provides simple financial information.
Cost of capital is the opportunity cost for a particular investment. It is the rate of return that an individual or organization would otherwise expect to receive, given the same level of risk as the investment that is chosen.
An example is when an investor purchases stock in a specific company. He is hoping to receive a certain level of return on this investment. Since the expected amount of his return is greater than the amount he initially invested, the cost of capital is the additional return on top of the investment.
Two terms used in cost of capital are cost of debt and cost of equity. In basic terms, cost of debt is calculated as the rate of a "risk free" bond with the same term structure as the investment, added with a default premium. Cost of equity, likewise, can be counted as a similar rate of return on a risk free investment, with an added premium for the expected risk.
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