Cost of capital is the return a business must offer to attract funding from lenders and owners. It blends the cost of debt and the return equity investors expect for the risk they take. Valuation professionals use it, or a related discount rate, to translate expected future cash flows into a present value.
Why it matters for owners
A firm seen as riskier, for example because of client concentration or owner dependence, generally faces a higher cost of capital, which lowers what a buyer will pay for the same earnings.
