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Cost Of Capital

A financial analysis of the cost of capital and its role in corporate investment decisions.

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  1. Page 1

    Cost Of Capital, page 1Cost of capitalAn important financial concept

  2. Page 2

    Cost Of Capital, page 2Capital 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?

  3. Page 3

    Cost Of Capital, page 3It 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

  4. Page 4

    Cost Of Capital, page 4It 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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