Cost of capital, Financial Management

COST OF CAPITAL

A project's Cost of Capital is the smallest amount of acceptable rate of return/required rate of return on funds committed to the project. It is a compensation for time and risk in the use of capital by the project.  Since the investment projects may vary in risk, each one of them will have its own exclusive cost of capital.

The Firm represents the aggregate of investment projects undertaken by it. so, the firm's Cost of Capital will be the overall required rate of return on the aggregate of the investment projects.

  • In NPV method, the Cost of Capital is the discount rate used for evaluating the desirability of an investment project.
  • In IRR method, Cost of Capital is the smallest amount of required rate of  Return on an investment project. It is also known as the cut off or forget rate or the Hurdle rate.
  • The Cost of Capital is the smallest amount of required rate of return on the investment project. It is also known as the cut off or target rate or the hurdle rate.
  • The Cost of Capital is the smallest amount required rate of return on the investment project that keeps the present wealth of shareholders unchanged.
Posted Date: 10/15/2012 9:27:22 AM | Location : United States







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

Write discussion on Cost of capital
Your posts are moderated
Related Questions
Evaluate the extent to which the Balanced Scorecard: The Balanced Scorecard has been described as an effective measurement system which enables managers of an organisation to

Criticism from the viewpoint of the proponents of the flexible exchange rate regime. Economic agents can hedge exchange risk through forward contracts and other methods. They do

Stock Exchange of Hong Kong Securities trading in Hong Kong started in 1866; however, the first formal stock market, the Association of Stockbrokers in Hong Kong, was establish

Steps involved in the Process of Securitization The following are the major steps involved: The lender (also called the originator) - in th

Define the following terms that relate to a convertible bond:  conversion ratio, conversion value, and straight bond value. The term conversion ratio is the number of shares of c

Capital cost of product a is ? 5 crores and initial capital cost of product b is ? 3 crores. Life of product a is 30 years and life of product b is 10 years . The difference in ini

Determination of explicit cost of capital Approach of determination of explicit cost of capital is similar to the one used to ascertain IRR, with one difference, in case of co

Investors are always interested in estimating the price sensitivity of a bond to change in market interest rates. Let us study how prices change both in terms of

differentiate between pricing and allocative efficincy

Let us express the process of calculating approximate percentage price change for a given change in yield and a given duration using the following formula: