Types of cost of capital & differential between them.

By- Mamta Thakur

Cost of Capital“Cost of Capital is the minimun rate of return that can be earned on investment made”

• More the risk more the cost of capital.• Helps in making better decision.

Sources of capital

Equity

Preference sharesDept

Cost of Debt

• “It is the rate of return expected by the lenders.”

• Interests.• Before tax cost of debt Kd = INT/B0• After tax cost of debt =Kd(1-T)

Cost of equity

“A firms cost of equity represents the compensation that the market demands in exchange for owing the assets and bearing the risk of ownership”

• Dividends .• Cost of equity with constant amount of

dividend is expected; Ke= DIV/P0

In case market value is increasing;

Cost of Preference share capital.

• “ Amount which is payable to the preference share holders with a fixed rate.”

• Dividend .• Irredeemable Preference share =PDIV/issue price• Redeemable preference share ={PDIV/(1+Kp)} + {Pn/(1+Kp)}

Equity

Vs

Debt

Equity

Vs

Preference share

Reference

• http://www.google.com/url?q=http%3A%2F%2Fwww.slideshare.net%2FRadhika101%2Fanr-copy&sa=D&sntz=1&usg=AFQjCNEGmmxSHBg8EtxowwWKBBwc6nKokA

• http://www.google.com/url?q=http%3A%2F%2Fen.wikipedia.org%2Fwiki%2FCost_of_capital&sa=D&sntz=1&usg=AFQjCNEgK1AYjxzoPDQmZbrSdq8MYZ8otQ

• http://www.google.com/url?q=http%3A%2F%2Fwww.slideshare.net%2FAswathyM%2Fcost-of-capital-36779492%3Frelated%3D2&sa=D&sntz=1&usg=AFQjCNHrZbdO4SFERT4EP0Qum-oMOYdlBA

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