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Cost of Capital

Cost of Capital

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Published by adi809here

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Published by: adi809here on Jul 14, 2009
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07/13/2009

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Cost of Capital
Cost of individual component of capitalinfluences capital structure of the Company andoverall cost is influenced by capital structureEstablishes ‘hurdle’ rate for capital budgeting for different projectsEvaluation of financial performanceAffects share price (GE touched market cap of US $ 543 billion as its return on capital was14.5% against estimated cost of capital of 8.1%)
 
 
Factors Influencing WACC
ExternalInterest rates ( lowest in Japan; demand &supply of capital)Market risk premiumTax rates (tax on dividend & capital gains,Dividend Distribution Tax, interest deductibleInternal
Capital structure
(debt, equity, preference,…optimum mix)Dividend & retention ratioInvestment policy (risky projects ?)
 
 
Factors determining
capital
 
structure
Sales stabilityAsset structure (collateral, special purpose &knowledge assets)Operating leverage & downward riskGrowth rateFloating costTaxesControlStability in earning (electricity generation vs. newtechnology)

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