Computation of the cost of capital, Financial Management

Assignment Help:

Q. Computation of the cost of capital?

Computation of overall cost of capital of the firm invoices

Cost of debts: debt may be issued at par , at premium or discount it may be perpetual or redeemable . the technique of computation of the costs in each can be explained as follows :

i) Debt issue at par: the computation of the cost of debts issued at par is comparative an easy task. It is the explicit rate of the interest rate adjusted further for the tax liabilities of the company. It may be computed according to the followings formula

Kd= (1-T)R

ii) Debts issued at the premium or discount: in case the debenture issued at premium or discount the cost of the debts should be calculated on the basis of net proceeds realized on the accounts of issue of such debenture or the bonds. Such costs may further be adjusted keeping in the view the tax rate applicable to the company

iii) Cost of the redeemable Debts: while calculating the cost of debts we have presumed that debenture are not redeemable during the life time of the company. However if the debenture are redeemable after the expiry limit of a fixed period the effective cost of the debenture before tax can be calculated by using the followings -

KD(before Tax) = {l+(p-np)/n}/{ (p+np)/2}


Related Discussions:- Computation of the cost of capital

Alternative dividend policies, The managing directors of three profitable l...

The managing directors of three profitable listed companies discussed their companies' dividend policies at a business lunch. Company A ; has deliberately paid no dividends for

DIVIDEND DECISION, WHAT ARE THE IMPORTANCE OF DIVIDEND DECISION IN FINANACI...

WHAT ARE THE IMPORTANCE OF DIVIDEND DECISION IN FINANACIAL MANAGEMENT?

What is coupon rate, What is Coupon Rate Coupon rate is the stipulated ...

What is Coupon Rate Coupon rate is the stipulated interest rate to be paid on the face value of a bond.  It represents a fixed dollar amount which is paid periodically as long

Explain the dividends and interest payments, Dividends and interest payment...

Dividends and interest payments Payment  of  dividends  and  interest  can  either  be  demonstrated under financing activities or  under operating activities. Sum of the 3

Feasibility of the project, From a practical point of view, the feasibility...

From a practical point of view, the feasibility of the project for Maribyrnong Council can be divided into three elements which are: logistical, operational and legal issues. First

Opposite project - net present value, A company has the opportunity to sell...

A company has the opportunity to sell an old machine. The machine is fully depreciated to a zero book value but could be sold for $5,000. If the company did not sell the machine, i

Explain about the term- contingent liabilities, Explain about the term- Con...

Explain about the term- Contingent liabilities Under IAS 37 provisions, contingent assets and contingentliabilities, contingent liabilities aren't recognised in the financia

Inflation in international markets, Inflation in International Markets ...

Inflation in International Markets In 1983, Gultekin tried to find out the relation between stock return and the inflation rates (expected/unexpected). He accomplished this by

Example of a budget, Group Activity An example of a budget can be seen ...

Group Activity An example of a budget can be seen below. After viewing the budget, identify the possible reasons for the variations. Budget - Jul / Dec 200X

Decision making, Write a report to the Board of Directors of Solvent Ltd to...

Write a report to the Board of Directors of Solvent Ltd to analyse the performance of companies X and Y and to give recommendation as which of those two investment opportunities is

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