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Presented By:-Debolina Bhattacharjee
Investors expects returns in their investments . In simple words. Company consider the return required as cost of capital .Cost of capital Cost of capital is defined as the minimum rate of return that a firm must earn on its investment for the market value of the firm to remain unchanged.
Components of Cost Of Capital The cost of capital is visualised as being composed of several elements.The main components are: Equity Capital Debt Holders Hybrid Securities .
.Importance of Cost of capital Cost of capital provides a yardstick to measure the worth of investment proposal and thus performs the role in accept-reject criterion.
Cost of equity:-It is the minimum rate of return that afirm must earn on the equityfinanced portion of an investment project in order to leave unchanged the market price of the share. Cost of preference share:-It may be defined as the dividend expected by the preference share holders. Cost of debt:-It is the after tax cost of longterm funds through borrowing. .
Company Logo .Factors affecting cost of capital Factors affecting cost of capital Controllable factors Uncontrolla ble factors.
a firm has control over its capital structure. As more debt is issued. the cost of debt increases. the cost of equity increases. and as more equity is issued. .Controllable Factors These are the factors affecting cost of capital that the company has control over. 1. targeting an optimal capital structure. Capital Structure Policy As we have been discussing above.
3. the company is making investments with similar degrees of risk. ± Affect business risk ± Affect financial risk .If the firm accepts a project that is considerably more risky than average. If a company changes its investment policy relative to its risk. both the cost of debt and cost of equity change.2.the supppliers of the funds are quite likely to increase the cost of fund. Operating and Financing Decisions It is risk associated with the projects undertaken. when making investment decisions.Investment Policy It is assumed that.
the cost of equity. which increases the cost of capital. 2Tax Rates Tax rates affect the after-tax cost of debt. For example. potentially. when interest rates increase the cost of debt increases. the cost of debt decreases.Uncontrollable factors These are the factors affecting cost of capital that the company has no control over: 1.Level of Interest Rates The level of interest rates will affect the cost of debt and. As tax rates increase. decreasing the cost of capital. .
.The suppliers of the fund will increase the cost of fund.Market Conditions .When the marketing condition is not favourable and The risk associated with projects also increases and the supplier of the fund demands more return investment. General Economic Conditions ± Economic conditions have grater impact on the operating profit of the firm.3.as In the case of unfavourable economic conditions. 4.