Composite cost of capital,
Definition of Composite cost of capital:
Weighted average of the component costs of common stock (ordinary shares), preferred stock (preference shares), and debt. Each component of capital is given a relative importance (weight) on the basis of its associated interest rate, managements loss of control, risk exposure, etc., to compute weighted average cost of capital. It shows the cost of each additional dollar of capital, as opposed to the average cost of the total capital raised.
Composite cost of capital is a company's cost to finance its business, determined by, and also referred to as "weighted average cost of capital" or WACC. The calculation involves multiplying the cost of each capital component by its proportional weight and taking the sum of the results. A company's debt and equity, or its capital structure, typically includes common stock, preferred stock, bonds, and any other long-term debt. A high composite cost of capital indicates that a company has high borrowing costs; a low composite cost of capital implies lower borrowing costs.
To help understand composite cost of capital, think of a company as a pool of money from two separate sources: debt and equity. Proceeds earned through business operations are not considered a third source because, after a company pays off debt, the company retains any leftover money that is not returned to shareholders (in the form of dividends) on behalf of those shareholders.
Meaning of Composite cost of capital & Composite cost of capital Definition
