Glossary (Body of Knowledge on Infrastructure Regulation)

Cost of capital:: The rate of return available on securities of equivalent risk in the capital market. Investors usually require compensation for risk, so the higher the investment risk, the higher the cost of capital. If a firm is financed by both debt and equity, its cost of capital is a weighted average of the cost from both sources. Investors are interested in the after-tax returns, so taxes are taken into account when calculating the weighted average cost of capital.

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