Introduction of the term Cost of capital

Question

Give a brief introduction of the term Cost of capital?

Answer 1

It is a procedure of increasing the funds that involves the cost in planning the capital structure, the employ of capital must be able of earning revenue to meet the cost of capital. There are changes in this due to two reasons which are illustrated below:

i) Interest rates are least than dividend rates.

ii) Interest paid on borrowed capital is a permissible for income tax purposes.