Cost of Capital
Thursday, March 26, 2009
As for as the paper of Business Finance Decision is concerned this topice is very important. So every student must has a sound knowledge of its concept and components.Cost of Finance is minimum rate of return that a firm must earn on its investment for the market value of the firm to remain unchanged.
Sources of Finances:
Finance required for investing purpose may be from one or combination of following sources;
- From Debt Source
- From Equity Source
Weighted Average Cost of Capital:(WACC) Capital is the combination of different components (sources) and cost of each component is called specific cost. When these costs are combined to arrive at overall cost of capital, it is referred to as Weighted Average Cost of Capital.Component of Cost of Capital:
- Risk free cost of particular type of financing
- Business risk premium
- Financial risk premium
In simple words, WACC is the combination of cost of equity and cost of debts.
Cost of Debt: is the after tax cost of long term funds through financing and
Cost of Equity: is the discount rate that equates the present value of all expected future cash dividends per share with the net proceeds of the sale of a share.
Labels: Exams
posted @ 9:57 AM,
5 Comments:
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At June 8, 2018 at 1:51 PM,
said...
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While starting a business, cost of capital is of extreme importance. If you are going to start a pressure washer business(like me), you need to focus on the initial cost and keep it as low as possible.
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