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cost of capital

The weighted average of the cost of various sources of capital, generally consisting of outstanding securities such as mortgage debt, preferred and preference stock, common stock, etc., and retained earnings, but which may include other interest-bearing obligations or sources of capital such as short-term notes, customer security deposits; and which may also include noninterest-bearing sources such as funds generated through use of deferred taxes, i.e., accelerated amortization, accelerated depreciation, and accumulated investment tax credit (subject to tax law limitations). The weight to be used for each source of funds generally is the percentage of each fund outstanding to the total amount outstanding of all sources of funds considered; however, target or projected ratios may also be used. The cost rate assigned each source may be the average cost of all obligations outstanding or projected costs for each source or a rate specifically assigned by a commission. The summation of the product of the weight (percentage) of each source to the total source times its cost is the cost of capital.

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