Cost of Capital Model
Updated 2026-09-11
INTRODUCTION
English translation pending.
CORE DEFINITION
A valuation model that estimates what a company pays for the capital it uses, most often as the weighted average cost of capital, which blends after-tax debt cost and equity cost by their funding weights. The core proposition is that capital is never free: any project returning less than this hurdle destroys shareholder value, so the figure sets the discount rate for investment decisions.
SCAFFOLDING EFFECT
Reduce cognitive load
- Hurdle setting: use the capital cost as the minimum return any project must promise. - Component costing: estimate debt and equity costs separately before blending them. - Discount discipline: discount project cash flows at the firm's own cost of capital.
Anchor fast decisions
Investors part with capital only for a return that compensates their risk, so every dollar a firm raises carries a price. Projects that earn above that price add value, and projects earning below it subtract value even when nominally profitable, because the capital they consume could have met its hurdle elsewhere.
MINIMUM ACTION
In progress 0/1Practice this model in one real situation:
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Source support: Explicit
- zh.wikipedia.orghttps://zh.wikipedia.org/wiki/%E8%B5%84%E6%9C%AC%E6%88%90%E6%9C%ACverified
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