Cost of Capital Formula

A firm’s primary financial objective is to maximize shareholder value. The firm can increase shareholder value by investing in projects that yield a return greater than the cost of capital.¬† Thus, the cost of capital is also referred to as a hurdle rate.¬† The firm analyzes prospective projects through capital ¬∑budgeting decisions, which involve discounted cash flow (DCF) analysis. The cost of capital should be the proper discount rate used in the DCF analysis.