Limitation of weighted average cost of the capital, Financial Management

Assignment Help:

Q. Limitation of weighted average cost of the capital?

1) Determine the Weight; the first and foremost difficulty in computing the average cost is to an easy job. This type of the capital structure.

2) Choice of capital structure: the Choice of capital structure is to be used for the determine the average is not an easy job. This type of the capital structure is these current capital structure marginal capital structure or optimum capital structure. Generally current capital structure as the optimum capital structure but is not always correct.

3) Other limitation

a) Average cost of capital cannot be used in the followings way:

i) When the company is trying to bring about radical change in the its debts policy

ii) When the dividend policy of the company is changed

iii) When the growth objective of the company is being changed

iv) When there is a changed in the capital structure involving change in debts equity mix.

b) It is presumed that the cost of raising the funds is in depend to the value funds raised the presumption does not hold good in the practices

c) The specific cost is based on the existing capital structure and these will change when the additional funds have been raised. A firms can not measure its cost directly on additional capital its can only be estimated. if the additional financing capital structure changes the effective rate of capital will also change.


Related Discussions:- Limitation of weighted average cost of the capital

Yield volatility and measurement, Measuring volatility is very impo...

Measuring volatility is very important as it is a critical input in valuation models. In subsequent chapters we will see the importance of assumed volatilit

Social responsibility-business ethics-business entity, Social responsibilit...

Social responsibility The firm must decide whether to operate strictly in their shareholders' best interests or be responsible to their employers, their customers, and the soc

Eoq inventory model primary variable, What are the primary variables being ...

What are the primary variables being balanced in the EOQ inventory model?  Explain The primary variables mortal balanced in the EOQ model are ordering costs and carrying costs.

How will you conclude the cost of capital, Q. How will you conclude the cos...

Q. How will you conclude the cost of capital from different sources? Ans. Implication of Cost of Capital: - Cost of capital of a firm is the least rate of return expected by it

Enumerate the potential drawbacks of divestment, Potential drawbacks of div...

Potential drawbacks of divestment - There may be some loss of economies of scale. Fixed overheads would have a lower capacity to recover them. - Cash generated may not be

Determine financial goal of the entrepreneurial venture, 1) What is the fin...

1) What is the financial goal of the entrepreneurial venture?  What are the major components for estimating value? 2) Briefly discuss the likely importance of an entrepreneur's

The main characteristics of debt and equity, QUESTION i) Distinguish be...

QUESTION i) Distinguish between intermediated and market finance using illustrative examples. ii) Differentiate between the main characteristics of Debt and Equity. iii)

How does it help financial managers make business decisions, What is the in...

What is the investment opportunity schedule (IOS)?  How does it help financial managers make business decisions? The investment opportunity schedule illustrates graphically pro

Show the statement of financial position, A friend is looking for advice on...

A friend is looking for advice on one of his investments, KER. KER manufactures stationery supplies, the entity appointed a new Chairman in 2008 and since then has been executed an

What are the reasons why organisations grow, What are the Reasons why organ...

What are the Reasons why organisations grow Required to provide higher financial returns to investors e.g. increases the wealth of shareholders Possible to achieve econ

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