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Definition: Cost of Capital is the amount, expressed as an annual percentage, that a firm must pay to obtain adequate funds (money) to finance its business and/or its operations.
The Cost of Capital is the weighted sum of the:
- Cost of Equity (regular shares)
- Cost of Preferred Stock (special shares)
- Cost of Debt (borrowings)
There are many different sources (types) of capital: traditional debt or equity financing or owner financing, grants, gains on investment capital, retained earnings, accrual financing contracts and forward payment agreements on capital.
See also WACC.