Q. Limitation of weighted average cost of the capital?
1) Determine the Weight; the first and foremost difficulty in computing the average cost is to an easy job. This type of the capital structure.
2) Choice of capital structure: the Choice of capital structure is to be used for the determine the average is not an easy job. This type of the capital structure is these current capital structure marginal capital structure or optimum capital structure. Generally current capital structure as the optimum capital structure but is not always correct.
3) Other limitation
a) Average cost of capital cannot be used in the followings way:
i) When the company is trying to bring about radical change in the its debts policy
ii) When the dividend policy of the company is changed
iii) When the growth objective of the company is being changed
iv) When there is a changed in the capital structure involving change in debts equity mix.
b) It is presumed that the cost of raising the funds is in depend to the value funds raised the presumption does not hold good in the practices
c) The specific cost is based on the existing capital structure and these will change when the additional funds have been raised. A firms can not measure its cost directly on additional capital its can only be estimated. if the additional financing capital structure changes the effective rate of capital will also change.