COST OF CAPITAL

Meaning:-
Investor point of view- The cost of capital of a firm is the
minimum rate of return expected by its investors. The
capital used by a firm may be in the form of debt,
preference capital, retained earnings and equity shares.

Company point of view-Cost of capital for a firm may be

defined as the cost of obtaining funds.

In conclusion we can say that, cost of capital is that

minimum rate of return which a firm, must and , is
expected to earn on its investments so as to maintain
the market value of its shares.
 cost of capital is very important in the financial
management, it can be used as a basis for evaluating
the performance of a firm and it further helps helps
management in taking so many other financial
decisions:-
1. As an acceptance criterion in capital budgeting

2. As a determinant of capital mix in capital structure

decision

3. As a basis for evaluating the financial performance

4. As a basis for taking other financial decisions

 1)COST OF EQUITY (Ke)

 2)COST OF DEBT (Kd)

 3)COST OF PREFRENCE SHARES (Kp)

 4)COST OF RETAINED EARNINGS

 The annual rate of return that an investor
expects to earn when investing in shares of
a company is known as the cost of equity. It
is denoted by Ke.

 Formula-
Ke = D X 100
P
 Cost of debt capital is associated with the
amount of interest that is paid on currently
outstanding debts. It is denoted by Kd

Formula-
 Cost of Debt = I (1 - TAX)

I = Interest
 The preference share capital is different from equity
share capital on account of two basic features :
 1)the preference shares are entitled to receive dividends
at a fixed rate in priority over equity shares.
 2)in case of liquidation of the company ,the preference
shareholders will get the capital repayment in priority
over the distribution among the equity share holders.

It is denoted by Kp .
 In accounting, retained earnings refers to
the portion of net income which is retained
by the corporation rather than distributed
to its owners as dividends
1. Historical cost-A measure of value used in accounting in which the
price of an asset on the balance sheet is based on its original cost when
acquired by the company.
For example, say the main headquarters of a company, which includes the
land and building, was bought for 100,000 in 1925, and its expected
market value today is 80000. The asset is still recorded on the balance
sheet at 100,000
2. future cost-The future costs are costs that are a current
projection of what the final cost will be at the completion of a specific task
or job. The future cost is the approximation of the probable total cost of a
product, program, or project that is computed on the basis of available
information. It is also known as the estimated cost.
3 .Composite cost-A company's cost to borrow money given the
proportional amounts of each type of debt and equity a company has taken on. A
company's debt and equity, or its capital structure, typically includes common stock,
preferred stock and bonds
4. Explicit cost-A business expense that is easily identified and
accounted for. Explicit costs represent clear, obvious cash
outflows from a business that reduce its bottom-line
profitability. 
Good examples of explicit costs would be items such as wage expense,
rent or lease costs, and the cost of materials
5. Implicit cost-A cost that is represented by lost opportunity in the
use of a company's own resources, excluding cash. The implicit cost for a
firm can be thought of as the opportunity cost related to undertaking a
certain project or decision
For example, the time and effort that an owner puts into the
maintenance of the company, rather than working on expansion, can be
viewed as an implicit cost of running the business
6.Average cost - average cost or unit cost is equal to 
total cost divided by the number of goods produced (the
output quantity, Q) AC=TC/Q

7.Marginal cost-The marginal cost of an additional unit of

output is the cost of the additional inputs needed to produce
that output.
Marginal cost and average cost can differ greatly.  For
example, suppose it costs $1000 to produce 100 units and
$1020 to produce 101 units.  The average cost per unit is
$10, but the marginal cost of the 101st unit is $20
 What is cost of capital
 Significance/importance of cost of capital
 Types of cost.