Cost of Capital: Types, Importance, Formula, and Example

For any entrepreneur or CFO, understanding the importance of cost of capital is vital for long-term sustainability. It represents the minimum rate of return a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital. According to the Reserve Bank of India (RBI) Master Direction on Lending Norms, maintaining an optimal capital structure is essential for systemic financial health and borrowing eligibility.

In this guide, we break down the components of cost of capital, its various types of cost of capital, and the cost of capital formula used by financial analysts to evaluate corporate viability.