factors affecting cost of capital
In this method proportion of each source in total capital structure is determined on the basis of the book value of securities. 
It equally averages a companys debt and equity from all sources. The cost of equity shares basically depends upon the expectations of the equity shareholders. This is the cost of retained earnings. It is the price that is paid for time and risk involved in obtaining the capital. A higher default risk will increase the cost of debt, as new lenders will ask for a premium to be paid for the higher default risk. The cost of capital is also high among both biotech and pharmaceutical drug companies, steel manufacturers, internet software companies,and integrated oil and gas companies. It represents the compensation that the market demands in exchange for owning an asset and bearing the risk associated with owning it. 95,000 whereas the amount of the dividend is Rs. 2. It is the additional cost of manufacturing an additional unit. + A business can be financed with 100% equity or a blend of equity and debt financing. This requires the computation of overall or average cost of capital. Costofequity If a project generates ERR which is less than cost of capital, the project will be rejected. 2) When dividends grow at different rates: In such a case, the constant growth equation mentioned above is to be modified to take into account two or more growth rates. So historical costs are the basis of existing capital structure. The opportunity cost of capital is calculated by the returns of the option that was foregone from the returns of the chosen option. Cost of debt refers to the pre-tax interest rate a company pays on its debts, such as loans, credit cards, or invoice financing. The term cost of capital is used by analysts and investors, but it is always an evaluation of whether a projected decision can be justified by its cost. Help your employees master essential business concepts, improve effectiveness, and Following are some of the factors that are beyond the firms control but affect its cost of capital: a) Level of Interest rate : If interest rates in the economy rise, the cost of debt increases because firms will have to pay bondholders a higher View the full answer Previous question Next question Composite Cost Of Capital: A company's cost to borrow money given the proportional amounts of each type of debt and equity a company has taken on. In theory, this figure approximates the required rate of return based on risk. Content Filtration 6. This rate of increase is termed as growth rate: 1) When dividends are expected to grow at a uniform rate perpetually: In this case, the yearly growth rate in dividend is added to the cost of equity capital as ascertained in accordance with the D/P ratio method. 
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