CONCEPT AND MEASUREMENT OF COST OF CAPITAL
The discussions in Chapters relating to capital budgeting have shown the relevance of a certain required rate of return as a decision criterion. Such a rate is the cost of capital of a firm. Apart from its usefulness as an operational criterion to accept/reject an investment proposal, cost of capital is also an important factor in designing capital structure. The relationship of cost of capital and capital structure of the firm is explored in part four. This Chapter is devoted to a discussion of the concept and measurement of cost of capital. Section 1 covers the importance of, and elaborates on the concept of cost of capital. The measurement of the specific cost of capital is examined in Section 2. Section 3 deals with the measurement of overall cost of capital and the related issues of determining the relative weights. The corporate practices followed in India are summarized in Section 4. The major points are summarized in the last Section.