Question

In what sense is the cost of capital an opportunity cost? An opportunity cost to whom? And, Is it possible that there could be sources of financing that have a zero cost?

Answer 1

Cost of capital is an opportunity cost because cost of capital would have been invested into other projects which have generated some rate of return so cost of capital will always be having an opportunity cost of investing into the alternative project so it can be said that the cost of capital is always carrying a opportunity cost with itself.

cost of capital is an opportunity cost for the shareholders because shareholders would have made rate of return after investment of those capital in other projects or they could have been paid dividend also so it is an investment opportunity loss and they will be demanding a hurdle rate to break even.

There are sources with 0% financing but in those method of financing, mostly there will be indirect payments by borrowers in form of some commissions or upfront fees which will be negating the impact of interest so eventually there is no 0% financing on the real front, but 0% financing will be just to show off that they have issued the the loan at 0% financing but the time value of money will be adjusting for all the interest payments in advance.