Sources of finance, cost of capital, capital structure

A firm raises money from owners (equity), lenders (debt) and its own earnings (retained profits), and each source has a cost. The cost of capital is the minimum return a project must earn to satisfy all fund providers. Worked example: if equity costs 14% and debt after tax costs 6%, and the firm is funded 60% by equity and 40% by debt, its weighted average cost of capital is 0.6 × 14 + 0.4 × 6 = 8.4 + 2.4 = 10.8%.