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
What is the investment opportunity schedule (IOS)?  How does it help financial managers make business decisions? The investment opportunity schedule illustrates graphically pro

Explain the difference between the discounted free cash flow model as it is applied to the valuation of common equity and as it is applied to the valuation of complete businesses.

are footnotes important in analysing ratios

there are 3 compaies i have to find out the price of equity share by using walters and gordons model.

What are the specefic control procedures of benchmarking Specific control procedures must be in place which include: O Organisational structure (clear lines of responsibilit

Which is lower for a given company:  the cost of debt or the cost of equity?  Explain: Ignore taxes in your answer . The cost of debt is all the time less as compared to the cost

What is Creative accounting Creative accounting (also termed as aggressive accounting or earnings management) distorts financial analysis of company accounts. Creative accounti

Yellow: is the company which their stock performance was forecasted by analyst Blue: is the name of the company which made the recommendation by the analyst who work for it R

Many practitioners feel that instead of using only on-the-run issues, all treasury coupon securities and bills are to be used for constructing the theoretical spo

1) According to the IFE (RIP), if U.S. investors expect a 3% rate of domestic inflation over one year, and a 6% rate of inflation in European countries that use the EUR, and requir