Types of cost of capital & differential between
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Transcript of Types of cost of capital & differential between
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
THANK YOU