Cost of Capital Calculator
Calculate the cost of capital for investment decisions and company valuation
Calculate Cost of Capital
Cost of Equity + Cost of Debt
Weighted Average Cost of Capital
Return shareholders expect on their investment
Effective interest rate on borrowed funds
Cost of Capital Results
Formula used: Cost of Capital = Cost of Equity + Cost of Debt
Cost Assessment
Example: Delta Technologies
Company Profile
Company: Delta Technologies
Cost of Equity: 8% (return shareholders expect)
Cost of Debt: 5% (effective interest rate on loans)
Method: Simple Formula (as per competitor example)
Calculation
Cost of Capital = Cost of Equity + Cost of Debt
Cost of Capital = 8% + 5%
Cost of Capital = 13%
Interpretation
• Delta Technologies needs to generate returns > 13% to create value
• This represents the minimum acceptable return on investments
• Can be used as discount rate for DCF valuation models
Key Components
Cost of Equity
Return shareholders demand
Usually higher than debt cost
Cost of Debt
Interest rate on borrowed funds
Tax-deductible in WACC
Weights
Proportion of each capital type
Based on market values
Investment Guide
Accept projects with returns > cost of capital
Use as discount rate for NPV calculations
Lower cost = higher company valuation
WACC is more accurate than simple method
Understanding Cost of Capital
What is Cost of Capital?
The cost of capital represents the minimum return a company must earn on its investments to satisfy all stakeholders and maintain its current market value. It's the blended cost of financing through debt and equity.
Why is it Important?
- •Investment decision benchmark
- •Company valuation input
- •Performance measurement tool
- •Capital structure optimization
Formula Comparison
Simple Method
Cost of Capital = Ce + Cd
Used for basic calculations and comparisons
WACC Method
WACC = E/(E+D) × Ce + D/(E+D) × Cd × (1-T)
More accurate, considers weights and tax benefits
Note: WACC is preferred for valuation and investment decisions as it accounts for capital structure and tax effects.