ABSTRACT
Cost of capital serves as a standard for establishing acceptable Return on investment (ROI) rates, as well as measuring whether actual ROI rates meet acceptable levels as in the case of operating divisions. It represents the interest or discount rate on the market value of cash flows used in measuring investments of a company. In evaluating new investments, it is important that the cost of capital meet several conditions. One condition is that the new investment incur the same historical risk typically undertaken by the company. Banks, particularly commercial banks, are a major source of funds. They provide short-term loans such as commercial loans, lines of credit, inventory financing, and accounts receivable financing. Other sources of funds involving debt include life insurance companies, factors, consumer finance companies, the Small Business Administration, and other governmental agencies, such as state and local industrial development administrations.
