Cost of Capital
Our cost of capital is the return we must earn on our investor's money to continue to keep their investment. If we earn less than the cost of capital, our investors will tend to draw their capital from the company, causing our stock to fall. If we earn more than the cost of capital, then our investors will want to invest more in our company, causing our stock to rise, and making it possible for us to grow.
What is the rate of return required by our investors? We can estimate it by looking at how risky companies like our are perceived to be relative to investments in other areas. A formula, known as Capital Asset Pricing Model allows us to make this estimation. According to this model, our cost of capital is: 12%.