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Financial Management - Capital Budgeting – A Conceptual Framework

Measurement of the Cost of Capital

   Posted On :  20.06.2018 01:05 am

The cost of the different sources of financing represents the components of continued cost.

Measurement of the Cost of Capital
 
The cost of the different sources of financing represents the components of continued cost. Each firm has ideal capital mix of various sources of funds; external sources (debt, preferred stock and equity stock) and internal sources (reserves and surplus). Determining of cost of capital involves relating the expected outcome of the specific source of capital to the market or book value of that source. Expected income in this context comprises interest, discount on debt, dividends, EPS or similar other variables most suitable to the particular case. The computation of the cost of capital involves two steps.

1. The computation of the different elements of the cost in terms of the cost of the different source of finance, and

2. the calculation of the overall cost by combining the specific cost into a composite cost.
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