Glossary

Cost of capital

Cost of capital is the blended rate a business effectively pays to fund itself — through borrowing and through the return its owners expect — and it sets the bar an investment must clear to be worthwhile.

2 min read

Blended rateDebt + equity cost

Hurdle rateThe return to beat

Definition

Cost of capital combines the cost of debt (interest, after tax relief) and the cost of equity (the return shareholders expect for their risk), weighted by how much of each the business uses. It is the hurdle rate: a project should earn more than this to create value.

In plain terms

If borrowing costs you 10% and a project returns 18%, the borrowing pays for itself and then some. If the project returns 7%, you are destroying value by funding it. Cost of capital is the line between the two.

Why it matters for your company

Directors use it to decide whether to borrow for growth. Compare a project's expected return with your cost of capital, and read should my business borrow to grow.