COST OF CAPITAL IN 2012
The cost of capital is one of the most important concepts in finance. It is the minimum acceptable rate of return that new investments must yield and it represents the long-term opportunity cost of the funds used by a company. If management decides to invest in projects with expected returns above the cost of capital, the company value goes up. Conversely, if a company invests in projects (that despite having positive profitability) with expected returns below the cost of capital, it destroys value and company value goes down. Similarly, the cost of capital is the discount rate that should be used in a discounted cash flow (DCF) analysis, in capital budgeting applications, when valuing a company or a division, or an acquisition target.