Concepts of cost of capital, Financial Management

Concepts of Cost of Capital

1. Explicit Cost And Implicit Cost

The explicit cost of any source of finance may be described as the discount rate that equates the current value of the funds received by the firm net of underwriting costs, with the current value of expected cash outflows. These outflows may be interest dividend, payments, or repayment of principal.

The implicit cost is the rate of return on the best investment chance for the firm and its shareholders, which will be foregone if the project currently under consideration by the firm is accepted.

2. Future Cost And Historical Cost

Future cost defines the expected cost of funds to finance the proposed project while Historical cost defines the cost already incurred for financing a particular project.

3. Specific Cost And Combined Cost

The Cost of every component of capital (that is equity shares/preference shares/de- bentures/loans/etc) is known as definite Cost of Capital.

The Composite/Combined Cost of Capital is the entire cost of capital from all sources (that is. equity shares/preference shares/debentures/loans/etc).

4. Average Cost And Marginal Cost

The average cost of capital defines the weighted average of the cost of each component of funds employed by the firm.  The weights are in proportion of the share of every component of the share in the total capital structure.

Marginal Cost of Capital is the weighted average cost of new funds raised by the firm.

Posted Date: 10/15/2012 9:29:06 AM | Location : United States







Related Discussions:- Concepts of cost of capital, Assignment Help, Ask Question on Concepts of cost of capital, Get Answer, Expert's Help, Concepts of cost of capital Discussions

Write discussion on Concepts of cost of capital
Your posts are moderated
Related Questions
a)   What are the pre-requisites of installation of responsibility accounting system? b)  Diffrence between 'cost centre' and 'profit centre'.

It is not easy to determine the theoretical value of non-treasury securities. However, we can use the treasury spot rate for the valuation of non-treasury security.

I am facing some problems in my assignment on the topic Preliminary Screening. Can anybody suggest me the proper explanation for it?

#what are the main points in scope or contents of financial functions#

You have just purchased a stock that would pay the dividends of the first four years as D1 = $0.65, D2 = $0.74, D3 = $0.79, D4 = $0.84. You were also told that the dividends would

how is operating cycle applicable to poultrybusiness in Uganda (broilers)

Determine the method of Credit Rating It is obligatory for the issuing companies to get credit rating done on debt securities issues. Credit ratings are also required for Comme

MARGINAL ANALYSIS It is difficult to develop the conditional profit table when there are a large number of scenarios and possible actions. The marginal analysis approach sides

Determine the Management buy-outs Management buy-outs (MBOs) The management of company buy out the shareholders. Management will usually require financial backers (ventu

How do we estimate expected incremental cash flows for a proposed capital budgeting project? We valuate expected incremental cash flows for a proposed project by valuating the