Trouble in determination of cost of capital, Financial Management

Assignment Help:

Q. Trouble in Determination of Cost of Capital?

Trouble in Determination of Cost of Capital:-

1. Historic Cost as well as Future Cost: - One main problem in the determination of cost of capital arises due to difference of opinion regarding the concept of cost itself. It is dispute that book costs are historic costs as well as the calculation of cost of capital on the basis of such costs is irrelevant for decision making.

2. Problems in calculation of Cost of Equity: - The calculation of cost of equity capital depends upon the rate of return expected by equity shareholders. But it is extremely difficult to assess the expectation of equity shareholders for the reason that there are many factors which influence their expectations.

3. Problems in calculation of cost of retained earnings: - Occasionally it may appear that retained earnings are free of cost because they haven't been raised from outside.

4. Problems in conveying Weights: - Weights have to be assigned to a variety of sources of finance to compute the weighted average cost of capital. The choice of utilizing the book value weights or market value weights places another problem in the calculation of cost of capital.


Related Discussions:- Trouble in determination of cost of capital

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

Accepting or rejecting project using internal rate of return, What is the d...

What is the decision rule for accepting or rejecting proposed projects while using internal rate of return? While the internal rate of return is greater or equal as compare to

Cost of retained earnings , Cost of Retained earnings (K ) Retained ea...

Cost of Retained earnings (K ) Retained earnings are that portion of EPS that is retained by the firm.  This may be measured as the rate of return which the existing share hol

Explain the significance of the term additional funds needed, Explain the s...

Explain the significance of the term additional funds needed . When the pro forma balance sheet is finished, total liabilities and total assets and equity will rarely match.

Concept of yield measures, A fixed income security investor can expect to r...

A fixed income security investor can expect to receive a rupee returns from the following sources: (a) Interest payment, (b) Capital gain or loss at maturity or when so

Define intermediation, Define intermediation The financial system makes...

Define intermediation The financial system makes it probable for surplus and deficit economic units to come together, exchanging funds for securities, to their mutual advantage

Bse-500 and sectoral indices, BSE-500 and Sectoral Indices On August 9,...

BSE-500 and Sectoral Indices On August 9, 1999, another new index was introduced in the market which was based on the data of 500 companies and designated as BSE-500 index. It

Net income that the company distributes to shareholders, The dividend is th...

The dividend is the part of the net income that the company distributes to shareholders. As the dividend represents real money, the net income is also real money. Is that true?

Evaluate the strength of the human development, In 2005, Mr. Gordon Brown's...

In 2005, Mr. Gordon Brown's brought up a plan of action to help reduce poverty and boost economic development in Africa. The three essential elements of the 2005 development plan

Simple arbitrage, Simple Arbitrage The easiest arbitrage opportunities ...

Simple Arbitrage The easiest arbitrage opportunities in the option market exist when options violate simple pricing bounds. No option, for example, should sell for less than it

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