I know that AFC covers the cost of debt (deduct in P/L) but normally we don’t deduct the cost of capital from the P/L?
Cost of equity is the called “Opportunity Cost of Capital” that the investor incurs when she chose investment A over investment B (the second best), where such opportunity cost is exactly the return that investment B would have yielded if it were chose.
So, investor will seek that investment A gets an average revenue at least equal to average cost in order to earn a normal profit. Average cost must include opportunity cost, otherwise the investment is losing money for the investor.
If you want to see it more raw:
Revenue = Cost + Profit
The confusion here is that “Cost” in economics is not the typical accounting cost that you see in the financial statements, it is that accounting cost plus the opportunity cost of capital, so the formula is:
Revenue = Cost
Lmao. Economics theory is that way, sorry.