Cost of capital is perhaps the most important ingredient in capital budgeting and plays a vital role in evaluation of any investment proposal. It has been defined as the minimum rate of return that a company must earn on an equity financed portion of its investments so that market value per share remains unchanged. In other words, cost of capital [...]
In this article we will discuss about the opportunity and marginal cost of capital, with the help of suitable diagrams. Opportunity Cost of Capital: When an organization faces shortage of capital and it has to invest capital in more than one project, then the company will meet the problem by rationing the capital to projects whose returns are estimated to [...]
The following points highlight the top four elements of cost of capital. The elements are:- 1. Cost of Equity Capital (Ke) 2. Cost of Retained Earnings (K) 3. Cost of Preferred Capital (Kp) 4. Cost of Debt (Kd). Element # 1. Cost of Equity Capital (Ke): The funds required for the project are raised from the equity shareholders, which are [...]