... of the firm, the financial manager should base his analysis on the weighted average of all such costs. To sum up, the firm's overall cost of capital will reflect the required return on the firm's assets as a whole. Given that the firm uses debt and equity capital, the overall cost of capital will be a mixture of the returns needed to compensate its creditors and its stockholders. In other words, a firm's cost of capital will reflect both its cost of debt capital and its cost of equity capital. First: The Cost of Equity: This is the hardest type of cost to calculate; the reason behind that is the fact that there is no way of directly observing the return that the firm's equity investors required on their investment. Instead such a return must be estimated. There are two approaches to determining the cost of equity: the Dividend Growth Model Approach and ...

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