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
what are the difference between receipt and payment account and income and expenditure account ?

Disadvantage of Joint Stock Companies Difficult to reconstruct the capital Many formalities in forming the company Heavy initial capital outlay. Loss of secrec

Define and explain the credit multplier

Selection of Remuneration Policy The alternative of a suitable remuneration policy through a company will depend, with another thing, on: 1. Cost: the extent to that the p

The average of the industry current ratio was 1.86 for 2004, 0.86 for 2005, and 0.87 for 2006. Lenovo had higher current ratio than the industry average in 2004. At that time, thei

Question 1: Consider a 5-year $10,000 endowment assurance issued to a select life aged 30 under the following bonus schemes:- (a) Simple reversionary bonuses of 5% p.a., 6%i

Cum. And Ex. - Terms Used in Capital Market Authority           These prefixes are written in front of other words as like capital, rights and dividends to qualify them."Cum" i


Instructions 1 This case study counts as part of your group project. 2 Project Group: You must complete this assignment together with the group that you initially registered

From the following information related to XYZ Ltd.; you are required to find out (a) contribution (b) Break-even point in units (c) Margin of safety, (d) Profit             Tota