|Cost of Capital|| |
The cost of capital is the cost of a company's equity and the after-tax cost of debt.
Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well). The cost of capital is a term used in the field of financial investment to refer from an investor's point of view to "the shareholder's required return". New projects of a company cannot be undertaken if they could cause the company to fall below the minimum return that investors expect for providing capital to the company. Controlling investors thus set a benchmark that a new project has to meet.