The author describes three interpretations of the cost of capital; one

The author describes three interpretations of the cost of capital; one as a value driver, one from the investor’s view point, and one from the viewpoint of the entrepreneur.

Explain these three different interpretations, provide an example of each, and confirm why each is an appropriate interpretation of the cost of capital.

ANSWER

The cost of capital can be thought of as the price a firm pays to obtain funds to undertake investment opportunities. Thinking of the cost as a value driver, the firm must invest in projects that exceed the cost of capital. I.e., if I obtain funds for 8%, I must earn in excess of 8% to grow the firm.
A second interpretation is that the cost of capital is the average cost of financing the various investments or projects facing the firm.
A third interpretation is that the cost of capital is the average cost of financing the various investments or projects facing the firm.