Cost of Capital
Financial Management Revision Article
Authors
Cost of debt
Cost of debt is calculated by equating the cash flows that happen now (cash inflow (value) realized the company through debt issue and cash flows that company pays through interest payments and principal repayments in the future)
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Cost of preference capital
The calculation is similar to cost of debt.
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Cost of equity
It is now estimated using capital asset pricing model.
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WACC
In the capital structure debt, preference and equity capitals can be there. Hence the cost of each source of capital is multiplied by its weight in the capital structure and sum of these weighted costs becomes the cost of capital of the company for a particular project or for the total company as the case may be.
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References
Prasanna Chandra, Financial Management, 5th Ed., Tata McGraw Hill, 2001
Brealey and Myers, Corporate Finance, Fifth Edition, Prentice Hall India, 2001
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