Cost Of Capital

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Cost of capitalAn important financial concept

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Capital is raised by the company for various purposes.Capital form the fundamental for any business.Company depends on various sources to raise the requiredcapital.The cost incurred by the company in raising the capital iscalled cost of capital(Brigham & Ehrhardt, 2008).The cost associated with these funds are called as cost ofcapital.What is cost of capital?

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It is one of the main source of capital.Debts are borrowings made bythecompany(Brigham &Ehrhardt, 2008).Fixed interest payment has to made on timely basis .Fixed payment is agreed at the time of loan or debt issue.Non-payment leads to bankruptcy.Increases financial leverage.Interest paid gives tax shield to the company.It has to be repaid at the time of maturity or expiry.Debt capital

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It includes both :Long-term loan.Bonds issued in the market.Long-term loan–cost of debt is interest rate.Bonds issue’s cost of debt is YTM.Tax rate is adjusted with the cost of debt.Financial leverage reduces the overall cost of capital(Brigham & Ehrhardt, 2008).Cost of debt capital

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