Significance of cost of capital

Significance of cost of capital:

A. Base of capital budgeting decisions:

The company wants to invest his money in various projects. Then it will compare their cost of capital and the company will not at all invest his money in that project whose cost of capital is lower than other project.

B. Base of redesigning of capital structure:

The cost of capital influences capital structure designing. The capital structure is just mixed of equity and debt and sources that company wants to acquire from investors. At that Time Company chooses that mixture of equity and debt in which cost of capital will become minimum. With this, company can raise the value of shares.

C. Base of other decisions:

There are many numbers of decisions and similar to dividend policy, interest policy that is depending on accurate computation of cost capital.

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