Cost of capital comes determined by the cost from the financing sources that the company used. The principal financing sources are the following:

 

 - The own resources, which are the contributions of the shareholders and the partners

 - The debt.

In order to be able to calculate the cost of the capital of a company we need to know the cost of each financing sources and what proportion represents each of the sources inside the total financing. The cost of debt refers to the interest rate that consists of asking financial institutions for loans or credit.

A shareholder invests his money in the company with the aim of obtaining minimal profitability. This concept (minimal profitability) is well-known as a cost of the own funds. As soon as we have this information at our disposal, we can calculate the capital cost as a weighted average of the cost of each of the financing sources.

As this concept can be complex to deal, it is going to be explained through an example which shows how to calculate the capital cost.