Basic assumptions of cost of capital, Financial Management

Basic Assumptions of Cost of Capital

The Cost of Capital is a dynamic concept affected by a multiplicity of economic and firm factors and assumes the following assumptions relating to taxes and risk:

1)       Business Risk:  It defines the risk of the inability of the firm to cover its operating costs. This cost is assumed to be unchanged that is the firm's acceptance of a given project does not affect its ability to meet operating costs.

2)       Financial Risk:  It defines the risk of the inability of the firm to cover the required financial obligations (interests, lease payments or preference dividend) is assumed to be unchanged.

3)       After Tax Costs:  They are considered applicable. The Cost of Capital is calculated on an after tax basis.

4)       Capital Structure: The firm's financial structure is assumed to stay fixed.

Posted Date: 10/15/2012 9:28:20 AM | Location : United States

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