Fundamentals of Financial Management, Third Edition

7

Cost of Capital

OBJECTIVES

To highlight the significance of computation of cost of capital

To show how cost of debt is computed

To show how cost of preference shares is computed

To analyse the different techniques of computation of cost of equity shares

To explain the concept of weighted average cost of capital

To explain the significance of marginal cost of capital

Any discussion on capital budgeting is not complete in the absence of a discussion of the cost of capital. This is because cost of capital acts as a cut-off rate or minimum rate of return required from an investment. An investment can bring gains only when its rate of return is greater than the cut-off rate. The present chapter, therefore, focuses on the computation of cost ...