# Category Archives: CONCEPT AND MEASUREMENT OF COST OF CAPITAL

## COST OF CAPITAL PRACTICES IN INDIA

COST OF CAPITAL PRACTICES IN INDIA COST OF CAPITAL PRACTICES IN INDIA   Finance-Assignments.comInstructions Feel free to send us an inquiry, we reply back real quick. Or directly email us at order@finance-assignments.comName *Email *Phone *Requirements/ Instructions File Upload File Upload File Upload  VerificationPlease enter any two digits *Example: 12This box is for spam protection - please lea

## Mechanics of Computation

Mechanics of Computation We now illustrate the mechanics of computation of the weighted average cost of capital. TABLE Weighted Average Cost of Capital (Marginal Weights) Mechanics of Computation This costs substantially lower than the weighted cost calculated using either book values or market values of historical weights. This is because debt finance has been used in large amount. Since only a limited amount of

## Book Value and Market Value Weights

Book Value and Market Value Weights The second aspect of assigning weights to various sources of finance in calculating the composite cost of capital relates to the choice between hook value weights and market value weights. This problem will arise only in the case of historical weights. Both these methods have their own merits. In theory, the use of market value weights for calculating the cost of capital is m

## Historical Weight

Historical Weight The alternative to the use of marginal weights is to use historical. Here, the relative proportions of various sources to the existing capital structure are used weights. In other words, the basis of the weighting system is the funds already employ firm. The use of the historical weights is based on the assumption that the firm’s structure is optimal and, therefore, should be maintained i

## Marginal Weight

Marginal Weight The use of marginal weights involves weighting the specific costs by the proportion of each type of fund to the total funds to be raised. The marginal weights represent the percentage share of different financing sources the firm intends to raise/employ. The basis of assigning relative weights is, therefore, new/additional/incremental issue of funds and, hence, marginal weights. In using margina

## Historical versus Marginal Weights

Historical versus Marginal Weights The first aspect of the decision regarding the selection of appropriate weights for computing the overall cost of capital is which system of weight in marginal or historical is preferable? The critical assumption in any weighting system is that the firm will raise capital in the specified proportions. Finance-Assignments.comInstructions Feel free to send us an inquiry, we r

## Assignment of Weights

Assignment of Weights The aspects relevant to the selection of appropriate weights are (i) Historical weights versus Marginal weights; (ii) Historical weights can be (a Book value weights or (1) ) Market value weights. Finance-Assignments.comInstructions Feel free to send us an inquiry, we reply back real quick. Or directly email us at order@finance-assignments.comName *Email *Phone *Requirements/ Instruc

## COMPUTATION OF OVERALL COST OF CAPITAL

COMPUTATION OF OVERALL COST OF CAPITAL The calculations of the cost of specific sources, namely, debt, preference shares, equity shares and retained earnings have been shown in the preceding discussions. In this section we propose to dwell on the computation of the overall cost of capital. The term cost of capital means the overall composite cost of capital defined as weighted average of the cost of each specifi

## Cost of Retained Earnings

Cost of Retained Earnings Retained earnings, as a source of finance for investment proposals, differ from other sources debt preference shares and equities. The use of debt is associated with a contractual obligate a fixed state of interest to the suppliers of funds and, often, repayment of principal at predetermined due. An almost similar kind of stipulation applies to the use of preference also. In the case o

## Capital Asset Pricing Model Approach

Capital Asset Pricing Model Approach. Another technique that can be used to estimate the of equity is the capital asset pricing model (CAPM) approach. We first discuss the CAPM. As approach to measure the cost of equity capital, it is described subsequently. The CAPM explains the behavior of security prices and provides a mechanism which investors could assess the impact of proposed security investment on their o