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Cost of capital refers to the minimum return a company must earn on its investments to satisfy its creditors, owners, and other capital providers. It represents the opportunity cost of using capital for investments. Purpose of cost of capital: 1. Investment decisions: To evaluate whether an investment will generate returns higher than the cost of capital. 2. Funding decisions: To determine the optimal mix of debt and equity financing. 3. Performance evaluation: To measure a company's performance and determine whether it is creating value for shareholders. Practical examples: 1. A company considers investing in a project with a 10% expected return. If the cost of capital is 12%, the project is rejected. 2. A company has a cost of capital of 9% and can issue debt at 7%. It may choose to issue debt to finance its operations. Weighted Average Cost of Capital (WACC): WACC represents the average cost of capital from all sources (debt, equity, etc.) weighted by their proportion in the company's capital structure. Formula: WACC = (E/V x Re) + (D/V x Rd x (1 - T)) Where: E = Market value of equity V = Total market value of the company (E + D) Re = Cost of equity D = Market value of debt Rd = Cost of debt T = Tax rate Capital restructuring: Capital restructuring refers to changes in a company's capital structure, such as: 1. Debt restructuring: Altering debt terms or replacing existing debt with new debt. 2. Equity restructuring: Changing the company's equity structure, such as issuing new shares or repurchasing existing ones. 3. Recapitalization: Significantly altering the company's capital structure, often to address financial distress. Capital restructuring aims to optimize the capital structure, improve financial performance, and increase shareholder value.