Methods For Estimating The Cost Of Capital

In this paper we wanted to identify the role of the cost of capital in making the decision on financing, and the main methods of determining the cost of equity and the cost of borrowed capital. It is known that when a company decides to invest, their main objective is the choice of funding sources that have the lowest cost. That`s why all the attention is focused on the cost of capital, because every business objective is to obtain enough long-term yield for the invested equity. Determining the cost of capital is an important problem in the business world for the following reasons:  To maximize the market value of the company. To this end, managers must act to minimize costs, including capital costs;  To make the right investment decisions, which requires for managers knowledge about the cost of different sources of business financing;  To decide on optimal and adequate terms regarding the funding policy and the floating capital policy.