The cost of capital is the average rate of return that the company earns on its...
The cost of capital is the average rate of return that the company earns on its investments.
True or false?
Homework Answers
The statement is FALSE.
The cost of capital is not same as the average rate of return that the company earns on its investment.
As the name suggest, 'Cost' of capital refers to the cost of fund that the company has obtained to carry on its business. Company acquires funds in form of Common Stock, Bonds Payable, Long Tern Debt. Eventually, Dividends and Interest are paid on these sources of Funds which become the 'Cost' of capital. Cost of Capital includes Cost of Equity and Cost of Debts.
However, the return that the company earns on its Investment is the revenue from its investment,
Hence, Cost of Capital is NOT the average rate of return that the company earns on its investments.
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