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
Question: Company XYZ currently operates a General Insurance company and would like to start selling life insurance products. The intended market is composed of both financial

Management of Account Receivable In order to keep current customers and attract new ones, most firms find it necessary to offer credit. Accounts receivable represents the exte

Credit Standards A firm may follow a stringent or a lenient credit policy. The firm subsequent of a lenient credit policy tends to sell on credit to customers on extremely lib

The financial data is of little value in its raw form. However, the same may be analyzed and be put in the form more meaningful to the recipients. This is normally done by using va

What are the Types of orders (i) Spot Delivery: Spot delivery means delivery and payment on the same day as date of the contract or on the next day. (ii) Hand Delivery:

What are depository institutions? Depository institutions: intermediaries along with an important proportion of their funds derived through customer deposits as consists of: co

What are the Features of Stock Exchange The key features of stock exchange are as below: (1) Organised Market: Stock Exchange is an organized market. Each stock exchang

if u were the professor wht your opinion about vincent mind stage

thew amount of money investedin a retirement fund is an example of

Financial Planning Project Instructions: You will serve as a financial advisor for your client to develop a financial plan. You can compile all the worksheets introduced in eac