Unit
i ni 03
ti :i Cost
1 i of Capital &
in
Sources
i 11 i i s of
i
t i Funds
i l l l in
CostofCapital
Thecostof capitalof afirm isthe minimum returnexpectedbyits investors It is
thecostofvarioussourcesoffinanceusedby thefirm Thiscapitalmaybe in the
formof debt preferencecapital termloans retainedearnings andequityshares
Theconceptofcost is veryimportant infinancialmanagement Adecision to invest in
particularproposal projectdependsupon variousfactors like cost risk return etc
nt
y
thinks input
11
ygmi.gg cqPa.pi Costbeingone
ofthemostimportantcomponents as it is the rateofreturnexpectedbyth
investors
measures c ost
opportunity
ofusing
ffine of
foundation capitalbudgeting It isalsoknown as DiscountRate IcutoffRate StandardRate 1TargetRate
cocitisimpossibletoevaluate HurdleRate MinimumRequiredRate
investmentisbeneficialor
whetheran
it is theRateofReturn afirmmust earn on its projects investments to maintain its
marketvalue and attractfunds
It helpsin achieving theobjectiveofwealth manimisation
increases
costofcapital
amp Itaphffrees
to weightedcostof
manimises
r eturns shareholders
higher dividendsand
earnings better SpgfGstof
risingshareprices capital
goodwillamongstakeholderscocis
creates
hipport'slongterm
growth
Factors affectingcost
ofcapital
Capitalstructure minofdebt equity
BusinessRisk risk
inherent
factors
investmentPolicy firmsdecisions
si iii iiiiiiiiii.mn
MarketInterestRate ratesinfluencecost b orrowing
of
investorsentiment tvems lowers keas investorsarewillingtoacceptl owerreturns
entitious
Macroeconomic conditions inflation volatility k
, ofsecurities
Marketability easilymarketablesecuritieslower k
Amount f inancingrequired largerrequirements
of k
Sources
of Finance
longTermfinancing thefundsbusinesses requireformorethan oneyear especially
formajorexpansions projects assetpurchases
Equityshares sellingownershipstake
Debentures longtermdebtinstrumentswithfinedinterest
Warrants theirh oldershaverighttopurchasesharesatf ixedprices infuture
Termloans loansfrombanks or institutions
leasefinancing leasinganets
Hybridfinancing combination
ofdebt equitylikeconvertible debentures
Venturecapitalfinancing equityinvestmentsfromventure capitalists typically startups
ShortTermfinancing abl
thesecoverimmediate operationalneeds generallyrepay
within a
year
BankOverdrafts
Tradecredit creditfromsuppliers
workingcapitalloans
commercialPapers unsecuredshort
termdebt
Factoring sellingreceivables forcash
, Sp
ftp.ni
rateofreturn expectedby lenders
1 Perpetual Irredeemable Debt
Before tax adjustment Tax Adjusted
100
d
sv Yin parprem age
kd
j
i t
i annual interest E
t tax rate
Sv funds receivedfromsaleofsecurity F
Interest
always onface value
11 Redeemable Debt
Kd ill t r
too
Ruatsu
RV v2
i annual interest E
t taxrate
SV cashproceeds fromsaleofsecurity
RV redeemablevalue E
nm term y
fc floatationcost
di discount onissue
pi premium on inve
on redemption
pr premium
CostofPreference kp
dividend expected
bypreference shareholders
i ni 03
ti :i Cost
1 i of Capital &
in
Sources
i 11 i i s of
i
t i Funds
i l l l in
CostofCapital
Thecostof capitalof afirm isthe minimum returnexpectedbyits investors It is
thecostofvarioussourcesoffinanceusedby thefirm Thiscapitalmaybe in the
formof debt preferencecapital termloans retainedearnings andequityshares
Theconceptofcost is veryimportant infinancialmanagement Adecision to invest in
particularproposal projectdependsupon variousfactors like cost risk return etc
nt
y
thinks input
11
ygmi.gg cqPa.pi Costbeingone
ofthemostimportantcomponents as it is the rateofreturnexpectedbyth
investors
measures c ost
opportunity
ofusing
ffine of
foundation capitalbudgeting It isalsoknown as DiscountRate IcutoffRate StandardRate 1TargetRate
cocitisimpossibletoevaluate HurdleRate MinimumRequiredRate
investmentisbeneficialor
whetheran
it is theRateofReturn afirmmust earn on its projects investments to maintain its
marketvalue and attractfunds
It helpsin achieving theobjectiveofwealth manimisation
increases
costofcapital
amp Itaphffrees
to weightedcostof
manimises
r eturns shareholders
higher dividendsand
earnings better SpgfGstof
risingshareprices capital
goodwillamongstakeholderscocis
creates
hipport'slongterm
growth
Factors affectingcost
ofcapital
Capitalstructure minofdebt equity
BusinessRisk risk
inherent
factors
investmentPolicy firmsdecisions
si iii iiiiiiiiii.mn
MarketInterestRate ratesinfluencecost b orrowing
of
investorsentiment tvems lowers keas investorsarewillingtoacceptl owerreturns
entitious
Macroeconomic conditions inflation volatility k
, ofsecurities
Marketability easilymarketablesecuritieslower k
Amount f inancingrequired largerrequirements
of k
Sources
of Finance
longTermfinancing thefundsbusinesses requireformorethan oneyear especially
formajorexpansions projects assetpurchases
Equityshares sellingownershipstake
Debentures longtermdebtinstrumentswithfinedinterest
Warrants theirh oldershaverighttopurchasesharesatf ixedprices infuture
Termloans loansfrombanks or institutions
leasefinancing leasinganets
Hybridfinancing combination
ofdebt equitylikeconvertible debentures
Venturecapitalfinancing equityinvestmentsfromventure capitalists typically startups
ShortTermfinancing abl
thesecoverimmediate operationalneeds generallyrepay
within a
year
BankOverdrafts
Tradecredit creditfromsuppliers
workingcapitalloans
commercialPapers unsecuredshort
termdebt
Factoring sellingreceivables forcash
, Sp
ftp.ni
rateofreturn expectedby lenders
1 Perpetual Irredeemable Debt
Before tax adjustment Tax Adjusted
100
d
sv Yin parprem age
kd
j
i t
i annual interest E
t tax rate
Sv funds receivedfromsaleofsecurity F
Interest
always onface value
11 Redeemable Debt
Kd ill t r
too
Ruatsu
RV v2
i annual interest E
t taxrate
SV cashproceeds fromsaleofsecurity
RV redeemablevalue E
nm term y
fc floatationcost
di discount onissue
pi premium on inve
on redemption
pr premium
CostofPreference kp
dividend expected
bypreference shareholders
