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COST OF CAPITAL

COST OF CAPITAL

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Published by Chintan Kenia

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Published by: Chintan Kenia on Mar 24, 2011
Copyright:Attribution Non-commercial

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03/24/2011

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COST OF CAPITAL
Introduction
‡
Important input in the capital budgeting
‡
It helps in determining present value
‡
Called weighted average of the cost
‡
Major long term sources of funds are
1)
Deb
t , 2
)
pr
efe
r
e
nc
e
shar
e
s,3
)
r
e
tain
e
d
e
arnings, and 4
)
 
eq
uitycapital
‡
E
ach source of fund has its cost calledthe specific cost of capital
 
SPE
CIFIC CO
ST
OFCA
P
I
T
AL
 
SPE
CIFIC CO
STS
OF CA
P
I
T
ALCO
ST
OF D
EBT1) P
erpetual debtKi= I/
SV
Kd= I/
SV
(
1-
t
)
where Ki= before tax cost of debtKd= after tax cost of debtI= annual interest payment
SV
= amount of debtt= tax rate

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