UNIT-2

COST OF CAPITAL
 Cost of capital
The concept of cost of capital budgeting is
concerned with cost of capital . The concept of
cost of capital is significant not only for capital
budgeting it is also indispensable in other areas
of financial management.
In operational terms the cost of capital is the
rate of return of a firm must earn on its
investments so that market value of the concern
remain unchanged.
 DEFINITION
“ Cost of capital is the minimum required
rate of earning or the cut off rate for
capital expenditure.”
Soloman Ezra
Importance of the concept of cost of
capital
(i) Designing the optimal Capital structure
(ii) Assisting in investment decisions
(iii) Helpful in evaluation of expansion
projects
(iv) Rational allocation of national resources
 MEASUREMENT OF COST OF
CAPITAL OR COMPONENT
1. Debts
2. Preference share capital
3. Equity Share capital
4. Retained earning
5. Depreciation fund
6. Short – term credit
 Cost of debts
A company obtains