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
Shareholders - Measuring Business Performance Shareholders Actual owners are interested in the company's both short and long term survival.  For this cause they will need

A bondholder buys a bond maturing in two years for Rs. 120 and earns Rs.15 per annum as interest. His YTM is ______ %.

Define the direct finance and indirect finance in markets. In direct finance, borrower-spenders borrow funds directly by lenders into the financial markets through selling them

Gross requirements of MRP System Accumulation of demand for this item from all sources independent and dependent. For instance, customer orders, spare part requirements, repla

Liquidity Preference Theory This theory states that short term bonds are extremely favorable than long term bonds for two (2) purposes. 1. Investors usually prefer short te

Ask questioAustralian’s Speleological App Projectn #Minimum 100 words accepted#

The following is the existing capital structure of Company XYZ Ltd. Ordinary shares at Shs.10 par 1,000,000 Retained 800,000 12% preference shares Shs.10 par 400,000 16% loan Shs.1

how to make a perdiem claim format to maintain the records of staff

Show that for any constant 0=a=1, C(aK1 + (1-a)K2) = aC(K1) + (1-a)C(K2) where C(k) is the European option price with strike K. All the options in this question are assumed to be

Significant Features of Partnership 1) The capital is contributed by the partners and no appeal is made to the public. 2) Like the sole proprietorship, a partnership has a l