The cost of the different sources of financing represents the components of continued cost.
of the Cost of Capital
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.
Tags : Financial Management - Capital Budgeting – A Conceptual Framework
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