Breaks in specific cost of capital, Financial Management

Assignment Help:

Breaks in Specific Cost of Capital: The specific costs of capital may also be affected by the amount of finance the firm wants to raise. As the amount of financing increases, the costs of various sources may also increase. These increasing costs are attributable to the fact that the investors would require greater returns to be compensated for the increased risk resulting from the larger volumes of new financing. Consequently, the WMCC tends to rise as the firm seeks more and more funds. Breaks in specific cost of capital occur as a function of the amount of funds being raised. The levels at which the specific cost of capital of a particular source increases are called the breaking points. The firm must find out at what levels of total new financing, the breaks in 'specific cost of capital and consequently breaks in WMCC occur and should also measure the WMCC at each of such breaks.

The following procedure can be used to measure the WMCC when the specific cost of capital depends on the amount raised:

a) Establish the percentage composition of new financing.

b) Prepare a list for each such source of financing giving the amount of funds that can be obtained and the specific cost of capital associated with each amount to be raised. The spe-cific cost of capital can be determined through an analysis of the current market conditions.

c) On the basis of the percentage composition of the total new financing (step1), estimates the breaking points in the WMCC. The break points identify the levels of the total new financing at which the WMCC increases.


Related Discussions:- Breaks in specific cost of capital

Performance evaluation, Performance evaluation One can determine this b...

Performance evaluation One can determine this by comparing the cash flow from assets and cost of capital. 1. Cash flow from assets Cash flow from assets is calculated

What is the difference between ias 14 and ifrs 8, Differences between IAS 1...

Differences between IAS 14 and IFRS 8 IFRS 8 requires identification of operating segments based on internal reports which are regularly reviewed by management for decision

Valuation of bonds and shares, three years ago, SSSG Ltd. issued 10 years $...

three years ago, SSSG Ltd. issued 10 years $1000 bonds with a 7% coupon rate paid semi-annually, at par value. the market currently requires a 9% yield. what was the price of bond

State the terms- stock and share, Explain the terms- Stock and  Share ...

Explain the terms- Stock and  Share Stock Ownership of a company represented by shares that are a claim on the company's earnings and assets. Share Unit of equity

price of the bond be if it is downgraded, Andrew Industries is contemplati...

Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from

How would the market price of a bond be affected, All other things held con...

All other things held constant, how would the market price of a bond be affected if coupon interest payments were made semiannually instead of annually? The majority of bonds i

Explain the term- market penetration, Explain the term- Market penetration ...

Explain the term- Market penetration A strategy which pursues to increase sales of existing services or products to the same market. Price reduction strategies Aggre

Buy side analyst, How to Industry analysis and finally stock picking from B...

How to Industry analysis and finally stock picking from Buy-side perspective

Explain the random walk model for exchange rate forecasting, Explain the ra...

Explain the random walk model for exchange rate forecasting. Can it be consistent along with the technical analysis? Answer:  The random walk model assumes that the current excha

Examine the pay-back period , Critically examine the pay-back period as a t...

Critically examine the pay-back period as a technique of approval of projects.

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd