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In your own words what is the cost of capital, when do you use it.

In your own words what is the cost of capital, when do you use it.

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Cost of capital refers to the required rate of return a company uses before undertaking any capital budgeting project or investment. It is the weighted average of a company's cost of equity and debt taken together. Weighted average cost of capital (WACC) is calculated as:
WACC=(Weight of equity)*(Cost of equity)+ (Weight of debt)*(Cost of debt)*(1- tax rate)

Cost of capital is used to determine the net present value of an investment in any project or investment.
Weighted average cost of capital is used by analysts while calculating the stock prices using financial models.

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