SAS INSTITUTE OF MANAGEMENT AND STUDIS

CORPORATE VALUATION AND MERGER

AND ACQUISITION

TOPIC NAME : COST OF CAPITAL

Presented by :
Vikas vartha
Presented to:
Prof.
  DEFINATION

“The cost of capital is the minimum required rate of earning or the cut-off
rate of expenditure.”
-Solomon Ezra

It required rate of return on invested fund.

  SIGNIFICANCE OF COST OF CAPITAL

• Helpful in capital budgeting

• Helpful in capital structure decisions
• Helpful in evaluating the financial performance
• Basis for other financial decisions like dividend policy, working capital
decisions, etc.
  TYPES OF COST OF CAPITAL

 Cost of Debt (Kd)

 Cost of Preference shares (Kp)
 Cost of Equity shares (Ke)
 Cost of Retained Earnings
  COST OF DEBENTURES

• It may be defined as the returns expected by the potential investors of debt

securities of the firm.
• It is represented by Ke Or Cd.
• It is calculated as before tax cost.
  COST OF PREFERENCE SHARE CAPITAL

• Cost of preference share capital is in terms of the fixed rate of dividend.

• It is calculated as after tax cost.

• PREFERENCE SHARE
1. Redeemable preference share.
2. Irredeemable preference shares.
  COST OF EQUITY

• It is the annual rate of return that an investor expects to earn when

investing in shares of a company. It is denoted by Ke.

• There is no commitment to pay equity dividend.

• It is the sole discretion of the board of directors to pay or not to pay

dividend or to decide at what rate the dividend be Pay to the equity
shareholders.
  COST OF RETAINED EARNINGS

• It is the opportunity cost of foregone dividend. It is represented by Kr.

• The earning to be retained are already after tax.

• Cost of retained earning (Kr) = cost of equity share capital (Ke).

THANK YOU