Marginal Cost of Finance, Finance Basics

Marginal cost of finance

This is cost of new finances or additional cost a company has to pay to raise and use additional finance is given by:

(Total cost of marginal finance/ Cost of finance (COF)) x 100

Cost of finance may be computed by using the following information like:

            i) Marginal cost of each capital component.

            ii) The weights based upon the amount to increase from each source.

a) Investors generally compute their return basing their figures on cost of investment or market values.

b) Investors purchase their investment on market value and like, the cost of finance to the company should be weighed against expectations based upon the market situation.

c) Investments appreciate in the stock market and like the cost have to be adjusted to reflect that a movement in the value of an investment.

1. Marginal cost of equity

MCE = (D1 / P0 -f)*100 (for zero growth firm)

Also cost of equity

Ke =  (D1 / P0 -f) (for normal growth firm)

Where: d1 = expected DPS = d0(1+g)

           P0 = current MPS

           f = floation costs

           g = growth rate in equity

1. Cost of preference share capital as:

Kp =(DP / P0 -f)*100  

Where: Kp = Cost of preference

           Dp = Dividend per share

           Po = MPS (Market price per share)

           F   = Flotation costs

2. Cost of debenture

Kd = Int (1-T) / Vd - f

Whereas: Kd = Cost of debt

               Int   = interest

               Po = Market price for debenture (at discount)

               f   = flotation costs

               t = Tax rate

3. Just like WACC, weighted marginal cost of capital can be computed using:

  1. Weighted average cost method
  2. Percentage method
Posted Date: 1/30/2013 4:39:06 AM | Location : United States







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

Write discussion on Marginal Cost of Finance
Your posts are moderated
Related Questions
1. The current interest rate is 6.83%. CanGo.com's stock has a beta of 2.0. Estimate the cost of equity. 2. CanGo.com has a bond with a semiannual coupon rate of 9% and 5 year m

Question: A non-zero coupon bond carries a coupon rate of 8 percent and has 9 years until maturity. It sells at a yield to maturity of 6 percent. The par value of the bond is

1. A stock pays no dividend and is expected to be sold for $50 after 4 years. If the investor's RRR is 12%, at what price is he/she willing to buy it? 2. ABC company has its ROE

Dividend Policies and Decisions Dividend policy determines the division of earnings among payments to stock holder's ad re-investment in the firm.  Hence now it looks at the f

Government Budget Deficit If the Government spends much more than it gets in from tax revenue, it runs a budget deficit. This deficit should be covered or financed either via

Define Meaning of Investment Meaning of Investment: Investment involves making of a sacrifice in the present with hope of deriving future advantages. Investment has many

Describe how society's interests can influence financial managers. Occasionally the interests of a business firm's owners are not similar as the interests of society.  For exam

Explain the Operations of Indian Stock Market. Meaning of Stock Exchange: Stock exchange means an organized market where securities issued by government organizations, compan

Example of Stock Market Index The following six companies constitute the index of democratic republic of Kusadikika.             Company  A  B

Blue Chips and Going Short or Long on Share - Stock Market Blue Chips Are first class securities of firms that have sound share capital and are internationally