--%>
Assignment Help - homework help

Describe the term cost of capital

Briefly describe the term cost of capital and also illustrate out its significance?

E

Expert

Verified

Cost of the capital is the rate of return that is minimum that has to be earned on investments in order to assure the investors of different types who are making investments in the company from debentures, shares and loans. It is employed in financial investment that refers to the cost of a company's funds or the shareholders return on the company's accessible deals. It is the necessary rate that a company should attain to cover the cost of generating funds in the market. Through seeing this only the investor invests the money in the company if the company is giving the necessary rate of return. It is a guideline to evaluate the profitability of various investments.

The significance of cost of capital is that it is employed to measure new project of company and permits the computations to be simple so that it has least return that investor expect for providing investment to the company. It has such significance in financial decision making. It really employed in managerial decision making in certain field like-

i) Decision on capital budgeting - It is employed to evaluate the investment proposal to select a project that satisfies return on investment.

ii) Employed in designing corporate financial structure - it is use employed to plan the market changeability and try to accomplish the economical capital structure for firm.

iii) Top management performance - It calculates the financial presentation of top executives. It engages the comparison of real profit of the projects and taken projects entire cost.

   Related Questions in Business Economics

  • Q : Writ short note on the Income of

    Writ short note on the Income of personal distribution?

    		•
  • Q : Meaning of Modigliani-Miller Briefly

    Briefly describe the meaning of Modigliani- Miller (M and M) approach?

    		•
  • Q : Cost of debt and Equity Cost of debt =

    Cost of debt= (1-tax rate)* interest rate * (debt ÷capital employed)Cost of equity = risk free rate + market premium (equity shareholders funds÷ capital employed)

    		•
  • Q : Economic sense production methods

    Evaluate and explain the statements: “In the economic sense production methods are the most efficient methods, once resource prices are considered and are lesser in sense of engineering”.

    		•
  • Q : Affluence tomorrow requires sacrifice

    Explain:  “Affluence tomorrow requires sacrifice today.”

    		•
  • Q : Illustrate the term Positive and

    Illustrate the term Positive and Normative Economics?

    		•
  • Q : Perfect Competition leads to Allocative

    A perfectly competitive industry achieves allocative efficiency since: w) goods and services are produced at the lowest possible cost. x) services and goods are produced up to the point where the last unit gives a marginal benefit to consumers equivalent to the margin

    		•
  • Q : History of King Louis world of commerce

    Early in the 18th century, a leading industrialist responded to an advisor of King Louis IV of France, who asked how the crown could most excellent facilitate the world of commerce, along with “Laissez nous faire,” that im

    		•
  • Q : Decomposition of Private Sector Can

    Can someone help me in finding out the right answer from the given options. The private sector is decomposed into: (1) Businesses and investors. (2) Households and stockholders. (3) Households and investors. (4) Businesses and households.

    		•
  • Q : Self-interested motivation to underpin

    Adam Smith’s perception which self-interested motives underpin even charitable activities through apparently selfless people appeared originally into his primary major book that was entitled: (1) Theory of Moral Sentiments [1755]. (2) Leviathan

    		•