COST OF CAPITAL

Cost of capital - Used in computing an objective function , it is the interest rate. The units are currency per time period (e.g., dollars per year). One must be careful in computing this. For example, the marginal cost of capital can be greater than the marginal interest rate because the latter applies to the entire borrowing, not just the last dollar borrowed. (This is the "classical" definition, which does not consider advances in option theory.)