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How is cost of capital the required return?

Naina (student) (151 Points)

15 February 2015

how can the lenders/owners RETURN be our COST??? why is such name given to their expected return?

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Jithin (Learner) (1057 Points)
Replied 15 February 2015

When you view it from the investor's/lender's perspective, dividend/interest is a return. But from the company's point of view, such dividends/interest are costs borne by the company for availing of funds in the form of equity capital/loan. Rate of return and cost of capital actually mean the same thing but given different terminologies based on the different perspectives of the investor/lender and the company. To make it even more clear, lets take a simple example where mr.A sells a product to Mr.B. For Mr.A it is a sales which is credited in his books but for Mr.B it is a purchase which is debited to his books of accounts. Here the same transaction is termed as both sales and purchases based on the different point of views of parties A and B..