Required Return vs. Cost of Capital

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Financial Policy & the Cost of Capital

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:02 Overview
  • 0:31 Required Return
  • 1:07 Cost of Capital
  • 1:41 Opportunity Cost
  • 2:44 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed
Lesson Transcript
Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

Let's take a look at how required return and cost of capital each offer different perspectives in figuring out the opportunity cost of different investment decisions.


As both a business owner whose company issues bonds to raise capital and a private investor, Roy needs to understand the risks and costs of his investment activities. His required return on his own investments and the cost of capital for his business each express the opportunity cost of investing, but from different perspectives. In this lesson, let's help Roy understand how these different figures work through different perspectives.

Required Return

Required return refers to the rate of return on an investment that Roy desires as an investor. His personal risk tolerance and financial goals determine what kind of instruments he should invest in.

If his reserve emergency funds merely need to keep pace with inflation, investments in U.S. government treasury securities offer relatively risk-free, though low, returns. If, on the other hand, he determines he needs to earn six percent annually on his investment, he would need to look to more risky investments, like stocks or bonds. The higher the risk of a specific investment, the greater the required return has to be in order to adequately compensate investors.

Cost of Capital

Cost of capital refers to Roy's costs of issuing securities, such as bonds and stocks, through his business. The perspective shifts to that of the company. If his company issues a bond at four percent, that is his cost of capital assuming it is the only bond the company has issued. The costs associated with issuing stock are difficult to determine as precisely as with bonds but is theoretically the same as investor expectations of required returns. The combined and weighted sum of all security costs is the weighted average cost of capital (WACC).

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account