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
Define the term Placement - Methods of Floating New Issues Under this method, issue houses or brokers purchase the securities outright with the intention of placing them wi

We have 10.000 genes and 4.000 of them are annotated for a certain attribute of interest. a. If we have a single set of 10 genes, how many of them should be annotated to be cons

Importance of Working Capital Management The finance manager must understand the management of working capital since of the following purpose: a) Time devoted to working c

Clientele Effect Theory Advance via Richardson Petit in 1977.It stated such different types of groups of shareholders or clientele have different type of preferences for divid

Draw the network diagram of the following project according to the activity list and relationships mentioned below Table 1 Activity Du

Say that a buyer of bonds values good bonds at $500 and values bad bonds at $250. Sellers of both good and bad bonds value them at $350. If the fraction of good sellers and bad s

High Potential Venture An organization begins with the intent of growing quickly to annual sales of at least $30 to 50 million in 5 years. It also has the potential to have a f

What you meant by monetary function in financial system? A significant function of a financial system is the monetary function. The introduction about money in the economy enab

A firm has a $100 million capital budget. It is considering two project, each costing $100 million. Project A has an IRR of 20%; has an NPV of $9 million; and will be terminated af

Profitability Ratio These ratios signify the performance of the firm in relation to its capability to derive returns or profit from investment or from sale of goods that is pr