IGNOU MCO 7 2026 - Explain the concept of cost of capital. Discuss the significance

Question

Explain the concept of cost of capital. Discuss the significance of cost of capital in financial decision-making and describe the major components of overall cost of capital.

12 Feb 2026

Answer :

Word Count : 443

The cost of capital refers to the minimum rate of return that a firm must earn on its investments to satisfy the expectations of investors and maintain the market value of its shares. It represents the opportunity cost of using funds for a particular project instead of investing them elsewhere with similar risk. In financial management, cost of capital acts as a benchmark for evaluating investment opportunities and determining whether a project will create or destroy value for the firm. It reflects the combined cost of various sources of

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