Concept And Measurement Of Cost Of Capital Pdf

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One of the most difficult tasks facing theCompensation Committee annually is the review and approval of the performance metrics and performance targets developed by management for inclusion in annual and long-term incentive plans.

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The basic motive of an organization to raise any kind of capital is to invest in its various projects for earning profit. Further, out of that profit, the organization pays interest and dividend to the sources of capital. The amount paid as interest and dividend is considered as cost of capital. The calculation of cost of capital is very significant for the management of an organization.

Cost of Capital: Meaning, Importance and Measurement

In economics and accounting , the cost of capital is the cost of a company's funds both debt and equity , or, from an investor's point of view "the required rate of return on a portfolio company's existing securities". It is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. For an investment to be worthwhile, the expected return on capital has to be higher than the cost of capital. Given a number of competing investment opportunities, investors are expected to put their capital to work in order to maximize the return. In other words, the cost of capital is the rate of return that capital could be expected to earn in the best alternative investment of equivalent risk; this is the opportunity cost of capital.

A company is raising funds from different sources of finance and doing business with those funds. The company has a responsibility to give a return to its funding providers. If a company has only one source of financing, then it is the rate at which it is required to earn from the business. However, the company may have raised funds from more than one source of finance, in which case WACC Weighted Average Cost of Capital must be found, which indicates the minimum rate at which the company should earn from the business in order to give a return to its finance providers, as per their expectations. The calculation of important metrics like net present values and economic value added requires the WACC.

Cost of capital

Definition : As it is evident from the name, cost of capital refers to the weighted average cost of various capital components , i. In finer terms, it is the rate of return , that must be received by the firm on its investment projects, to attract investors for investing capital in the firm and to maintain its market value. On raising funds from the market, from various sources, the firm has to pay some additional amount, apart from the principal itself. The additional amount is nothing but the cost of using the capital, i. To cover the cost of raising funds from the market, cost of capital must be obtained. Hence, it establishes a benchmark, which must be met out by the project. However, if a firm is incapable of reaping the expected rate of return, the value of shares in the market will tend to decline, which will lead to the reduction in the wealth of the shareholders as a whole.


r Discuss the meaning of cost of capital for raising capital from different sources of finance. r Measure cost of individual components of capital r Calculate.


Importance and Use of Weighted Average Cost of Capital (WACC)

Let us make an in-depth study of the meaning, importance and measurement of cost of capital. An investor provides long-term funds i. Thus, to the company, the cost of capital is the minimum rate of return that the company must earn on its investments to fulfill the expectations of the investors. In other words, it is the minimum rate of return required on the investment project to keep the market value per share unchanged.

Cost of capital is vital part of investment decision as it is used to measure the value of investment proposal provided by the business concern. It is used as a discount rate to determine the present value of future cash flows related with capital projects. Cost of capital is also termed as cut-off rate, target rate, hurdle rate and required rate of return. When the companies are using different sources of finance, the finance manager must take vigilant decision with regard to the cost of capital; because it is closely associated with the value of the firm and the earning capacity of the firm. There is bulk of finance literature to describe this concept.

Она уже была готова распахнуть дверь, как вдруг до нее донеслись какие-то звуки.

7 Methods for Measuring Cost of Capital

Слава Богу, разрешено хоть. Стратмор требовал запретить всяческий доступ, но Фонтейн настоял на. - В шифровалке нет камер слежения? - удивился Бринкерхофф. - А что, - спросила она, не отрываясь от монитора, - нам с Кармен нужно укромное местечко. Бринкерхофф выдавил из себя нечто невразумительное. Мидж нажала несколько клавиш. - Я просматриваю регистратор лифта Стратмора.

Джабба почувствовал, что она медлит с ответом, и снова нахмурился.  - Ты так не считаешь. - Отчет безукоризненный.

Assumption of Cost of Capital

Я хотел, чтобы никто ничего не заподозрил. Любопытным шпикам не придет в голову сесть на хвост преподавателю испанского языка. - Он профессор, - поправила его Сьюзан и тут же пожалела об. У нее часто возникало чувство, что Стратмор не слишком высокого мнения о Дэвиде и считает, что она могла бы найти себе кого-то поинтереснее, чем простой преподаватель.  - Коммандер, - сказала она, - если вы инструктировали Дэвида сегодня утром по телефону из машины, кто-то мог перехватить… - Один шанс на миллион, - возразил Стратмор, стараясь ее успокоить.  - Подслушивающий должен был находиться в непосредственной близости и точно знать, что надо подслушивать.  - Он положил руку ей на плечо.

Звук выстрела продолжал звучать у нее в голове. Горячий пар пробивался через люк подобно вулканическим газам, предшествующим извержению.

Вот такое агентство. На другой стороне авениды Изабеллы он сразу же увидел клинику с изображенным на крыше обычным красным крестом на белом поле. С того момента как полицейский доставил сюда канадца, прошло уже несколько часов. Перелом запястья, разбитая голова - скорее всего ему оказали помощь и давно выписали.

Примененные атомные бомбы были неодинаковы. В них использовалось разное топливо - разные элементы. Соши хлопнула в ладоши. - Он прав. Я читала об .

Время для него остановилось.

3 Response
  1. Danielle A.

    Cost of capital is measured for different sources of capital structure of a firm. It includes cost of debenture, cost of loan capital, cost of equity share capital, cost of preference share capital, cost of retained earnings etc.

  2. Cindy K.

    So now we have two ways of estimating the cost of equity the return required by shareholders.

  3. Casandra M.

    company's cost of capital is the cost of its long-term sources of funds: debt, preferred get a better idea of the typical mix of debt, preferred stock and common stock. that the book values of capital are historical measures and looks instead.

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