Cost of Capital

Course : Commerce
Paper : Fundamentals of Financial Management
Lesson : Cost of Capital
Lesson Developer : Dr. Vinay Kumar
Department/College : Commerce Department,
Aryabhatta College,
University of Delhi
Reviewer’s Name : Dr. Gurmeet Kaur
Fellow in Commerce, ILLL
Associate Professor,
Daulat Ram College,
University of Delhi

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 Cost of Capital

Lesson: Cost of Capital

Table of Contents:
1. Learning Outcomes
2. Concept and Meaning
3. Importance of Cost of Capital
4. Types of Cost of Capital
4.1: Implicit and Explicit Cost of Capital
4.2: Specific and Overall Cost of Capital
5. Measurement of Cost of Various Sources of Finance
5.1: Cost of Debentures
 Cost of Redeemable Debentures
 Cost of Irredeemable Debenture
5.2: Cost of Preference Shares
 Cost of Redeemable Preference Shares
 Cost of Irredeemable Preference Shares
5.3: Cost of Equity Shares
 Divided Model
 Dividend plus Growth Model
 P/E Method
 CAPM Model
5.4: Cost of Retained Earnings
6. Weighted Average Cost of Capital
7. Risk Return Analysis of Various Sources of Finance
8. Factors Affecting Cost of Capital
Summary
Glossary
Exercises
References

1. Learning Outcomes:
After studying this chapter the students should be able to:
 Understand the concept of cost of capital;
 Know different types of cost;
 Calculate cost of different sources of finance;
 Explain the factors affecting cost of capital;
 Calculate weighted average cost of capital of the company;
 Understand requirement of cost of capital.

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 Cost of Capital

2. Concept and Meaning:

Cost of capital is the most important concept in financing decisions. In order to evaluate
the projects a firm need cost of capital of that project. If the cost of capital of the project
is higher than expected return from the project then project is rejected. Therefore cost
of capital serves as the yardstick for accepting or rejecting the project. A company needs
fund to finance (buy) long term assets of the firm. These funds can be raised either
through debt e.g. debenture, loan etc and equity shares. These sources of funds always
have cost. The cost of these sources is minimum payment that a firm must pay to
lender/shareholder to fulfil their expectation. This minimum payment on debt/equity is
nothing but cost of capital of debt or cost of capital of equity. Therefore the cost of
capital is the minimum payment a firm has to pay to its investor on the money advanced
by them. Alternatively cost of capital can also be defined as the minimum rate of return
that a firm must earn so as to keep the market price of its equity shares unchanged. It
is also called discount rate, minimum rate of return, hurdle rate.
The term cost of capital means the cost of the funds being raised by the firm. It should
not be confused with cost in raising the fund. For instance flotation costs like brokerage
and commission are cost incurred in raising the fund and it cannot be termed as cost of
capital. A firm has to pay interest on long term debt funds and dividend on its equity and
preference shares. The payment of interest and dividend is cost of capital of debt and
equity respectively.

Value Addition 1: Know More

Cost of Capital
Click on the link given below to gain an insight into the concept of
cost of capital.

Source: https://hbr.org/2015/04/a-refresher-on-cost-of-capital

3. Importance of Cost of Capital:

Cost of capital is the concept of vital importance in the field of financing decision making.
Long term capital decisions are based on the cost of capital concept. A project cannot be
evaluated without the help of cost of capital as it serves as the yardstick for accepting or
rejecting a project. Cost of capital is useful in the following decisions:
Evaluating Investment and Capital Budgeting Decisions:
The main purpose of measuring the cost of capital is to use it as a standard for
evaluating the investment projects. All long term projects or capital budgeting decisions
are taken on the basis of cost of capital. As earlier stated cost of capital is the minimum
rate of return that a project must earn to keep the market value of the shares
unchanged. If the rate of return of the project is higher than cost of capital, project will
be accepted otherwise it will be rejected. For example in NPV method a project with
positive NPV is accepted while project with negative NPV is rejected. The NPV of the
project is calculated by discounting the cash inflow/outflow of the project with the cost of
capital. Therefore cost of capital serves as the standard for not only evaluating the
capital budgeting decisions but also help in the case of capital rationing decisions.
Deciding Debt Component in Capital Structure:
Cost of capital plays an important role in deciding the debt component in overall capital
structure of the firm. Debt is cheap source of fund as interest payment on debt is tax
deductible. But debt also increases the financial risk of the firm as it a fixed charge on
the earning of the firm. Therefore the objective of the finance manager is to use only
that amount of debt in capital structure that will enhance the shareholders wealth.

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 Cost of Capital

Performance Appraisal:
Cost of capital can be used as a tool to measure the performance of top management.
Performance of the management can be judged by comparing the actual profitability of
the project undertaken by the management with cost of capital of the firm.

Value Addition 2: Know More

Importance of Cost of Capital

Click on the link given below to gain an insight into the significance
of cost of capital.

Source: http://accountlearning.blogspot.in/2011/07/significance-and-
components-of-cost-of.html

4. Types of Cost of Capital:

Cost of capital can be classified into various categories. The following are a few types of
costs of capital:

4.1: Implicit and Explicit Cost of Capital:

Explicit Cost of Capital:
Explicit cost of capital is the actual payment made by the firm to procure the fund. For
instance interest paid by the firm on debenture is the actual cost of debenture or
alternatively called explicit or real cost of capital. As per Porterfield ”explicit cost of any
source of capital is the discount rate that equates the present value of cash inflows that
are incremental to the taking of financial opportunities with the present value of its
incremental cash outflow.” So explicit cost of capital is the real cost incurred by the firm.
Explicit cost is also called out of pocket cost as these are actually paid. Explicit cost of an
interest free loan is zero since there is no actual payment in the form of interest
although principal is repayable.
Implicit Cost of Capital:
Implicit cost of capital is the notional cost of capital. It is also called opportunity cost of
capital. Implicit cost of capital does not involve any outflow of fund. The best example of
implicit cost is the cost of retained earnings. Implicit cost of retained earnings is the
opportunity cost foregone by the shareholder, had these earnings been distributed to
them as dividend. Therefore explicit cost arises when funds are raised while implicit cost
arises when funds are used. Implicit cost cannot easily be measured and therefore not
recorded in the books.

4.2 Specific Cost and Combined Cost:

Specific Cost of Capital:
Specific cost is the cost of each source of fund used. For example if firm is using three
sources viz. equity shares, debentures and long term loan then respective cost of these
three will be termed as specific cost. Specific cost is used when a project is financed
through a specific source of fund.
Combined Cost of Capital:
When the specific cost of each source of finance is combined together it becomes
combined cost or overall cost of capital. It is also known as composite cost or weighted
average cost of capital (WACC). Combined cost is used to evaluate those projects which
are financed through more than one source of finance. The combined cost of capital can
be shown as follows:

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 Cost of Capital

Ko= ke*we+kd*wd+kp*wp+ke*we
Where w is the weight assigned to each source of finance.

5. Measurement of Cost of Capital:

Every firm needs to measure its cost of capital accurately and carefully because all long
term investment decisions are taken on the basis of the cost of capital. If it is not
calculated properly than some projects which are not profitable may be accepted thereby
leading to loss of wealth of shareholders. Generally cost of capital is calculated on after
tax basis. As we know that interest payment on debt component is tax deductible
therefore cost of debt capital will always be after tax basis. For other sources of capitals
like equity share and preference share there is no need to make adjustment for tax
benefits as dividend paid on these shares does not enjoy tax deductions.
Measurement of cost can be divided into two parts:
 Measurement of specific cost
 Measurement of combined cost or overall cost

5.1: Cost of Bonds and Debenture/Long Term Loans:

Debt is one of important component of the overall cost of the firm. It plays an important
role. The debt component can significantly increase or decrease the overall cost of
capital (ko) of the firm thereby deciding the fortune of the firm. There are various ways
to raise debt capital. Firm can borrow it from the financial institutions (banks) or it may
approach the public and raise fund through issue of debentures. The decision is taken by
the management keeping various factors in mind viz easily availability, formalities
required, tenure of the loan requirement and more. A debenture may be issued at par,
discount or even at premium. The coupon rate (stated interest rate) on the debenture
forms the basis for calculation of cost of debenture. A debenture certificate hold by
debenture holder indicates coupon rate, date of payment of interest, period of holding
and date of repayment of principal i.e. maturity date. Debenture can mature at par or at
premium at the time of maturity.
The cost of debenture and bond can be calculated for redeemable or irredeemable
(perpetual) bonds.
 Cost of Irredeemable Debt:
The concept of irredeemable debt is theoretical in nature as loan amount has to
be repaid at the time of maturity. The cost of debt can be calculated with the help
of following formula

Kd= I/NP or I/ MP0

Where I= Interest Payment made Annually
NP= Net Proceeds at the time of Issue of Debenture/Bond
MP0= Current Market Price of the Debenture
Kd= Cost of Debenture
The above calculation can be said to be cost of debt capital before tax basis as tax
deduction has not been incorporated. Since interest paid on debt capital is tax deductible
therefore above cost can be adjusted for tax benefit. As a result of interest tax shield the
after tax cost of the debt to the firm will be substantially low than the investor expected
required rate of return. That is why though debt is a risky capital but it’s a cheap source
of finance. Every firm should use it with due diligence. After tax cost of debt can be
calculated as follow:

Kd= I(1-t)/NP or I(1-t)/MP0

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 Cost of Capital

or alternatively it can be Kd=Kd (1-t)

Where t= Rate of Tax
Numerical 1:
A company issue 10% perpetual debt of Rs. 2,00,000. The applicable tax rate is 50%.
Calculate the cost of debt assuming that debt is issued at:
a. Par;
b. 10% discount;
c. 20% premium
Solution: Calculation of cost of debt
a. Issued at Par

Kd(before tax) = I/NP

=20,000/2,00,000
= 10%
Kd(after tax) = Kd(1-t) Or I(1-t)/NP
= 10%(1-.5)= 5%
b. Issued at discount

Kd(before tax) = I/NP

= 20,000/ 2,00,000-20,000 x 100
= 11.11%
Kd (after tax) = I(1-t)/NP
= 20,000(1-.5)/2,00,000-20,000 x100
=5.55%
c. Issued at Premium
Kd(before tax) = I/NP
= 20,000/ 2,00,000+40,000 x 100
= 8.33%
Kd (after tax) = I(1-t)/NP Or Kd(1-t)
= 8.33%(1-.5)
=4.16%
 Cost of Redeemable Debt:
While calculating cost of redeemable debt one should remember to account for interest
payment and principal repayment on the debt capital. There are two methods for
repayment of the principal (i) principal can be repaid in one lump-sum amount at the
maturity or (ii) part of principal can be repaid annually along with interest.
If principal is repaid in one lump-sum amount, the cost of debt can be measured by two
methods
(a) Trial and Error Method
(b) Short Cut Method

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 Cost of Capital

(a)Trial and Error Method:

Trial and error method is the cumbersome technique of calculation of cost of capital. This
method can be applied all cases whether principal is repaid in instalments or at maturity
in lump-sum amount. Cost of debt capital can be obtained with the help of following
formula:

Numerical 2:
XYZ Ltd. Issues 15% Debentures of face value of Rs. 100 each at floatation cost of Rs. 5
per Debenture. Find out the cost of capital if the debenture is to be redeemed in 5
annual instalments of Rs.20 each starting from the end of year 1. The tax rate may be
taken at 30%.
Solution: In the given situation, the net proceeds i.e., Bo is Rs. 100- 5 = Rs.95. As the
debenture is to be amortised in 5 instalments of Rs. 20 per year, the interest at 15% will
be payable only on the reduced balances as follows:

Year-end Interest Repayment After-tax Cash Flow

1 15 20 20 + 10.5 = 30.5
2 12 20 20 + 8.40 = 28.40
3 9 20 20 + 6.30 = 26.30
4 6 20 20 + 4.20 = 24.20
5 3 20 20 + 2.10 = 22.1

These after-tax cash flows may be discounted at an appropriate rate , say, 12 % and
13%, to be made equal to Rs.95 i.e.,
95= 30.5/(1+ Kd)1 + 28.4/(1+ Kd)2 + 26.3/(1+ Kd)3+ 24.3/(1+ Kd)4 + 30.5/(1+ Kd)5
At kd = 12%, the right hand side of the equation gives a value of Rs.96.518
At kd = 13%, the right hand side of the equation gives a value of Rs.94.391
By interpolation between 12% and 13%, value of kd comes to 12.71%.
Conclusion: The cost of capital of debt kd increases as the net proceeds from the debt
issue decreases because the investors have paid less to get the fixed interest payment
and the principal repayment. By paying Rs.95 only and getting Rs.100, the investors
have a capital gain which accrues to them proportionately every year. The rate of
interest on the debenture is 15% and therefore the after-tax cost of debt should be
10.5% only. However, due to net proceeds of Rs.95 only, the cost of debt (after-tax)
comes to 12.71%.
(b) Short Cut Method:
Short cut method is an approximation of cost of debt. This is the simplest way to
calculate cost of capital. But this method cannot be applied if repayment of principal
amount is in instalment. It means this method is used only when entire principal is
repaid at the maturity. Cost of debt through short cut method can be obtained as

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 Cost of Capital

follows:
I(1-t)+ (RV-NP)/N
Kd = ----------------------
(RV-NP)/2
Where RV= Redeemable value of the debenture (debenture can be redeemed at
premium. If debenture is redeemed at premium then its redeemable value will be higher
than face value.)
NP= Net Proceeds from Issue of Debentures (Face Value-Discount on issue- underwriting
Commission or Flotation costs + Premium on Issue)
I= Interest Payment
t = Tax Rate
N= Number of Years of Debt
Numerical 3:
A company has issued 10% debenture of Rs. 100 each at 15% premium redeemable at
par after 10 years. The flotation cost is estimated to be 2%. Calculate cost of debentures
given the corporate tax rate is 40%.
Solution:
Cost of Debenture
Net Proceeds= Face Value +Premium on Issue- Flotation Costs
NP = (100+15)-(1-.02) =Rs. 112.7

I(1-t)+ (RV-NP)/N
Kd = ----------------------
(RV-NP)/2
= Rs. 10(1-.4) + (100-112.7)/10
-----------------------------------
(100+112.7)/2
= 4.73/106.35 = 4.44%
5.2: Cost of Preference Shares:
Preference shares enjoy the advantages of both debt and equity capital. As the name
suggest these share holder are paid first while declaring the dividend. There is a fixed
rate of preference dividend and the dividend gets accumulated in case company is not
able to pay in a particular year. But Preference share holder cannot take any legal action
against the company for non payment of dividend. Although there is no legal binding on
firm to pay dividend to preference share, but nothing can be paid to equity shareholder
until payment is made to preference shares and their dues are cleared. Moreover if
dividend on preference shares remains in arrear than preference shareholder gets the
right to participate in the management. Though the failure to pay dividend to preference
shares does not result in bankruptcy it may result in damage to credit standing of the
company in the market. Company will find it difficult to raise fresh fund through issue of
shares. Also market value of the firm will be adversely affected. The dividend paid to
preference share is not tax deductible as it is not an expense. Preference dividend is
always paid out of profit.
There are two types of preference share
(a) Irredeemable Preference Shares
(b) Redeemable Preference Shares

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 Cost of Capital

Cost of Irredeemable Preference Share:

Kp=PD/NP
or Kp= PD/MP0
Where Kp= Cost of Preference Shares
PD= Annual Preference Dividend
NP= Net Proceeds from Issue of Preference Share
(Issue Price-Flotation Cost—Discount on Issue +Premium on Issue)
MP0 =Current Market Price
Numerical 4:
XYZ Co. Ltd issues 10% irredeemable preference share of face value of Rs. 100 each.
Flotation cost of the issue is 5% of the issue price. Calculate the cost of preference
shares if shares are issued at:
(i) Par
(ii) 10% Premium
(iii) 15% Discount
Solution: Calculation of the cost of irredeemable preference shares when:
(i) Issued at Par
Kp = PD/NP or MP
= Rs. 10/100 x100
= 10%
(ii) Issued at 10% Premium
Kp = PD/NP
= Rs. 10/110(1-0.5)
= 9.56%
(iii) Issued at 15% Discount
Kp = PD/NP
= Rs.10/ 85(1-.5)
= 18.03%
Cost of Redeemable Preference Shares: Cost of redeemable preference shares can
be calculated with the help of two methods:
(a)Trial and Error Method:

Numerical 5:
Sanchit Ltd. issues 15% Preference Shares of the face value of Rs.1000 each at a
flotation cost of 4%. Find the cost of capital of Preference Share if

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 Cost of Capital

a. the preference shares are irredeemable, and

b. the preference shares are redeemable after 10 years at a premium of 10%.
Solution:
a. If the preference shares are irredeemable, then the cost of capital is
kp = 150/960 = 15.63%
b. If the preference shares are redeemable, then the cost of capital may be
calculated by solving the following equation

where n is taken as 10
PD = 150
Pn = 1100
At kp = 16 %, the right hand side of the equation may be written as:
= 150 (PVAF (16%,10)) + 1100 (PVAF (16%,10))

= 150 (4.833) + 1100 (.227)

= 974.60
As the value is more than Rs. 960, the rate of discount may be increased to 17%
At kp = 17%, the right hand side of the equation may be written as:
= 150 (PVAF (17%,10)) + 1100 (PVAF (16%,10))

= 150 (4.659) + 1100 (.208)

= 927.60
By interpolating between 16% and 17%, the value of kp comes to 16.31% as follows:
Kp = 16% + (974.60-960)
(974.60-927.6)
= 16.31%
Conclusion: The cost of preference share, kp, is higher i.e., 16.31%when it is redeemed
after 10 years at 10% premium. The reason for this is premium payable at the time of
redemption. In the same case, if the premium is not payable at the time of redemption
and the preference share is redeemable, instead at Rs. 960 only, then the cost of capital
will be as follows:
At kp = 16%, the right hand side of the equation (1) may be written as
= 150 (PVAF (16%,10)) + 960 (PVAF (16%,10))

= 150 (4.833) + 960 (.227)

= Rs. 942.7
At kp = 17%, the right hand side of the equation (1) may be written as:
= 150 (PVAF (15%,10)) + 960 (PVAF (15%,10))

= 150 (5.019) + 960 (.247)

= Rs. 989.90
By interpolating between 15% and 16%, the value of kp comes to 15.63%.

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 Cost of Capital

Conclusion: The cost of capital is same at 15.63% as it was when the preference shares
were treated as irredeemable. However, if the preference shares are redeemable at par
i.e., Rs.1000, the kp comes to 15.83%. This increase in cost of capital from 15.63% to
15.83% arises because of premium of Rs. 40 payable at the time of redemption. This
premium is a gain to shareholders but reflect a cost to the company as indicated by the
increase in cost of capital.
(b)Short Cut Method:
Kp = PD+ (RV-NP)/N
-----------------------
(RV-NP)/2
Where
RV= Redeemable value of the Preference (Preference can be redeemed at premium. If
Preference is redeemed at premium then its redeemable value will be higher than
face value.)
NP= Net proceeds from issue of Preference shares (Face value-discount on issue-
underwriting commission or flotation costs+ premium on issue)
PD= Preference Dividend
N= Number of years of debt
Numerical 6:
Y Ltd. Issue preference shares of face value of Rs.100 each carrying 15% dividend and
company realized Rs. 95 per share. These shares are repayable after 5 year at 10%
premium. Calculate cost of preference shares if the tax rate applicable to the company is
40%. Use short cut method.
Solution:
Cost of preference share using short cut method
Kp = PD+ (RV-NP)/N
-------------------
(RV-NP)/2

= Rs. 15+(110-95)/5
------------------------ = 18/102.5 =17.56%
(110+95)/2
5.3: Cost of Equity Shares:
Generally it is argued whether equity share involve any cost or not as there is not legal
binding to pay any dividend to the equity shareholders even for years. There is no
specific rate of dividend like preference share. But it is wrong to believe that equity
shares are free of any cost. Equity shares involve an opportunity cost. The equity
shareholder supplies the fund in expectation of dividend and capital appreciation of their
share price in the market. Therefore the cost of equity (ke) can be defined as minimum
rate of return that a company must earn to leave the market price of shares unchanged.
Thus it is the rate which equates the present value of expected stream of dividend and
net sale proceed realised when share is sold with the current market value of share.
In practice it is a difficult task to measure the cost of capital. The cost of equity can be
calculated with the following equation:
MP0= D1/(1+ke)1+ D2/(1+ke)2...............Dn/(1+ke)n+Pn/(1+ke)n
Where MP0= current market price of equity share
D= dividend payment for different year

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 Cost of Capital

Ke= cost of equity

Pn= market price of share at the time of sale
Cost of equity capital can be calculated with the help of following methods:
(a) Dividend Model
(b) Dividend plus Growth Model
-When dividend grows at constant rate
-when dividend grows at different rates
(c) P/E (Price Earning Method)
(a) Dividend Model:
As stated earlier cost of equity is the function of stream of future dividends. Therefore,
the cost of equity can be calculated by equating the stream of expected dividend to its
current market price of the share. In case of fresh equity shares net proceeds will be
taken in place of current market price as shown below;
i. Cost of New Equity
Ke= D1/NP
Where NP= net proceed from the issue of share capital i.e. issue price+-flotation
cost
ii. Cost of Existing Equity
Ke= D1/MP0
Where MP0= current market price of the share or market price of the share at the
beginning of the year one.
Numerical 7:
A company has issued equity share of 100 Rs each at a discount of 5%. Flotation
charges are 10% of the issue price. The company expect to pay dividend at 10%.
Determine the cost of equity capital.
Solution:
Ke= D1/ NP
= 10/ 100-5(1-f)
= 10/85.5
=11.69%
Numerical 8:
A company’s shares are traded in stock market at Rs. 90 per share of face value of Rs.
100 each. Find out the cost of equity capital if the company is expecting to declare a
dividend of Rs. 5 per share at the end of the year.
Solution:
Calculation of the Cost of Equity Capital

Ke = D1/ MP
=Rs. 5/ 90
= 5.55%

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 Cost of Capital

(c) Dividend plus Growth Model:

It is impractical to think that there will be no growth or growth rate will remain same in
the dividends in future as discussed in the previous pares. If there is change in the
earning of the firm then dividend declared will also change. Dividend plus growth model
take into account the growth expected in the dividends in the future. Constant growth
rate
Formula to calculate cost of equity is
Ke= D
---------------- + g
MP0 or NP
Where MP0= Current Market Price
NP= Net Proceed form the Issue of Shares
g= Growth Rate
Numerical 9:
A company declares a dividend of Rs. 5 last year and expected to have a growth rate in
dividend equal to 10%. Find out the cost of equity capital if the current market price of
the share is (a) Rs. 60 and (b) Rs. 70.
Solution:
Calculation of Cost of Equity
(a) If share price is Rs 60
Ke = D1/MP +g
D1 = D0(1+g)
D1 = Rs. 5(1+10% of Rs. 5)
= Rs. 5.5
So Ke = Rs.5.5/60 +10%
= 19.16%
(b) If Share price is Rs. 70
Ke = D1/MP + g
=5(1+10%)/MP +10%
= 17.85%
Numerical 9:
A company’s current market price of equity share is Rs. 30. The company has paid a
dividend of Rs. 2 per share and investors expect a growth rate of 6% per year in
dividends. You are required to compute:
(i) Company’s equity cost of capital
(ii) If the company’s cost of capital is 8% and anticipated growth rate is 4%
per annum, calculate market price if the dividend of Rs. 2 is to be paid at
the end of the year.
Solution: (i) The cost of equity capital
Ke = D1/MP +g
= Rs. 2(1+6%)/ Rs. 30 + 6%
= 13.06%

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 Cost of Capital

(i) Market Price of the equity share can be obtained with the help of same formula as
follows:
Ke =D1/MP +g
MP = D1/Ke-g
= Rs. 2/ .08-.04
= Rs. 50
(d) Price Earning (P/E) Approach:
In this approach price of the equity share depends upon the earnings of the company
Earnings include both retained earnings and dividend paid to shareholders. Therefore
this approach assumes that investor capitalize stream of all future earnings of the firm to
calculate the price of the share. The cost of equity can be obtained in this approach
using the following formula
Ke= E/NP
Where Ke= Cost of Equity
E= Earnings per Share
NP= Net Proceeds from Equity Share
Alternatively
Ke = EPS/ MP0
or = 1
-------------
P/E ratio
Where E= total earning available to equity shareholder
MPo = current market value of equity share
Note: In case of new equity issue net proceeds from the equity share will
replace current market value per share. So the formula will be
Numerical 10:
Following information is provided for X Ltd.
Current market price= Rs.100
Current earning = Rs. 40,00,000
Shares outstanding =2,00,000
Additional fund needed= Rs. 6,00,000
Flotation cost = Rs. 10 per share or 10%
The X Ltd can sell share at a discount of 10%. Find out the cost of equity assuming that
company’s earnings are stable.
Solution:
As stated above the cost of equity can be obtained with the help of following formula
Ke = EPS/NP
EPS= Total earnings / number of equity shares outstanding
=40,00,000/ 2,00,000
= Rs. 20 per share
NP = Net proceeds from issue of equity shares
= 100 – discount - flotation cost

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 Cost of Capital

= 100- 10% of 100- 10

=80 Rs.
Therefore Ke= Rs,20/ Rs.80
=.25 or 25%

5.4: Cost of Retained Earnings:

Retained earning is that portion of profit which is not distributed to shareholder as
dividend. It is like saving of the shareholders. Though it is argued that retained earning
has no cost but it is not true. Retained earnings always involve opportunity cost. For
instance if the retained earning would have distributed to the shareholder as dividend,
they would have invested it in the shares of the same or shares of the other firm to earn
a return at least equal to ke. Therefore firm must earn on its retained earning equal to
ke to ensure that market price of the shares do not fall. If return on retained earnings is
less than ke (cost of equity) than market price of the shares will fall. Since cost of
retained earning is the dividend income foregone by the shareholder that is why it is
called opportunity cost. This is the best example of implicit cost since nothing is paid out
of the pocket.
It is also be remembered that cost of retained earnings is not exactly equal to cost of
equity as cost of equity involve brokerage cost or flotation cost which is absent in case
of retained earnings. Moreover cost of equity also involves corporate dividend tax which
is paid by the company at the time of declaration of the dividend to shareholder. Thus
cost of retained earnings will be always be lower than cost of new equity capital because
new equity capital involve flotation cost. The cost of retained earning can be calculates
as follows:
(i) If there are no taxes and flotation cost
Kr=Ke
It means there will be no difference in the cost of retained earnings and cost of equity.
(ii) If there are taxes and flotation cost
Kr= Ke(1-t)(1-f)
It means the cost of equity will be adjusted for the tax rate and flotation cost which is
not involved cost of retained earnings. Therefore in this case cost of retained earnings
will be lower than the cost of equity.

6. Weighted Average Cost of Capital (WACC):

Weighted average cost of capital can be calculated once the specific cost of each
component is calculated. Weighted average cost of capital or overall cost of capital is the
sum of product of weight of each source of fund with their respective cost. The cost of
capital of each component should be calculated on an after tax basis. While calculating
WACC, different types of weight namely market value weight, book value weight, target
weight or marginal rates can be used.
The calculation of WACC involves the following steps:
(i) Calculation of the cost of each component
(ii) Finding out and ascertain which weight to use
(iii) Calculation of sum of the product of each cost component and their respective
weight.
For example, if a firm is using only two sources of finance viz. debt and equity capital
then WACC can be calculated as follows:
WACC= Kd*Wd +Ke*We

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 Cost of Capital

Similarly if a firm is using more than two sources of fund then equation can be extended
in similar fashion.
Assignment of the Weights:
As discussed in the previous part, weighted average cost of capital or overall cost of
capital can be obtained by addition of the product of individual cost of each component
with their respective weights. Therefore we need weight of each source of finance in
overall capital structure in order to calculate WACC. There are four types of weights
which can be used. These are:
1) Historical Weight
Historical weights can be of two types;
i) Book Value Weight; ii) Market Value Weight
2) Target Weight
3) Marginal Weights
Book Value Weights:
Book value means the amount recorded in the books of accounts of the firm. So book
value weight of individual source of finance is the respective proportion of source in
overall capitalization. For instance; book value of equity share can be obtained as:
No. of Equity Share* Face Value or Equity Share Recorded in the Books of
Account
Book value of preference share and debt can also be obtained in the similar fashion.
Advantages of Book Value Weights:
i) Easy to calculate and use as these are available from the records.
ii) WACC based on book value weight provide more stable cost of capital as book value
weights doesn’t change on day today basis.
iii) Stable cost of capital can be used for accepting or rejecting more than one project.
Market Value weight:
Market value of different source of finance especially Equity Shares can be obtained by
multiplying market price of equity share with total number of equity shares of the firm.
For instance if total number of equity share is 100000 shares and market price of one
equity share is Rs. 12, then total market value of equity shares will be 100000*12= Rs.
12,00,000. Market value of equity share may be different than the book value of the
firm. One should remember here is that the market value of debt will remain equal to
the book value of debt as the debt or loan is not traded on stock market.
There are certain advantages of using market value weight in place of book value
weights. These advantages are:
i) WACC based on MV weight approximate the current or actual cost of capital
ii) Banks and financial institutions lend their money on the basis of actual cost of
capital of the projects.
iii) Since projects are taken at current cost so WACC based on market weight will be
more suitable while accepting or rejecting a proposal.
Though cost of capital based on market weights presents true cost of capital but it has
some limitations too.
i) The market value of the shares fluctuate on day to day basis, so it is not possible
to calculate stable cost of capital which can be used at two different point of time.
ii) Market value of share may not represent true value of share at a time as market

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 Cost of Capital

value of share is influenced by many factors viz. bearish and bullish conditions ,
insider trading , slow done in the market, etc. Therefore cost based on market
value will be of no use in financial management.
iii) Market value of some securities may not be easily available all the times.
So, the use of market value weight or book value weight depends on various factors
such as philosophy of the management, timing of the project, conditions of stock
markets, etc.
2. Marginal Weights:
Marginal weights are used when a firm is raising the finance for a particular project. So,
the marginal weights mean the proportion in which the firm wants to raise additional
fund from different sources. In other word, the proportions in which additional funds are
raised to finance the investment proposal are known as marginal weights. The WACC
calculated on the basis of these weights are also called incremental cost of capital.
Though marginal weights seem to be theoretically sound as we are comparing additional
cost with the additional revenue from the project but there are some shortcomings of the
marginal weight system. Marginal weights are not suitable if the company is planning for
long term investment decisions. A particular source may be cheaper in present scenario
but may prove to be wrong in the future.
Target Weights:
Target weight present the proportion in which a company intend to finance it long term
financial capital requirements. Thus target weight means the proportion of debt and
equity in the long term capital structure of the company. Though in the short run the
concept of optimal capital structure may be irrelevant but in the long run every firm
strive for the minimum cost through optimal capital structure.. If company is already
working under optimal capital structure then target weights will be equal to historical
weights of the company.
Calculation of Weighted Average Cost of Capital:
Numerical 12:
The following information is given in the Balance Sheet of a company;
Equity Share Capital (Face Value of Rs. 10) Rs.8,00,000
Preference Share Capital (Face Value of 100 each) Rs. 4,00,000
10% Debentures (Face Value of Rs. 100 each) Rs. 8,00,000
...............................
Total Rs. 20,00,000
Other Information;
Equity shares are currently selling at Rs. 20 per share. The company paid a dividend of
Rs. 2 per share last year. The dividend is expected to grow @ 5% p.a. The preference
shares and debentures are traded in the market at Rs. 90 and 70 per share respectively.
The tax rate applicable to the company is 40%.
Find out weighted average cost of capital using:
(i) Book Value Weight
(ii) Market Value Weight
Solution:
Calculation of specific cost of capital of each source
Kd = I(1-t)/MP
= Rs. 10(1-.4)/70 = 8.57%

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 Cost of Capital

Kp = PD/MP
= Rs. 15/90
= 16.67%
Ke = D1/MP +g
= Rs. 2(1+5%)/ 20 +5%
= 10.5%+5%
= 15.5%
(i) Calculation of WACC Based on Book Value Weights:
Source of Capital Book Weight (w) Cost of W×COC
Value(Rs.) Capital(k)
(Total of book value/
respective book or (COC)
value)
Equity Share 8,00,000 0.4 .155 0.062
Capital
15% Preference 4,00,000 0.2 .1667 0.0333
Share Capital
10% Debentures 8,00,000 0.4 .857 0.3428
Total 1.0 .1295
So, WACC is (.1295×100) =12.95%
(ii) Calculation of WACC based on Book Value Weights:
Source of Capital Market Weight (w) Cost of W×COC
Value(Rs.) Capital(k)
(Total of Book Value/
or (COC)
Respective Book Value)
Equity Share 16,00,000 0.635 15.5 9.84
Capital (Rs.20
×8,000 Shares)
15% Preference 3,60,000 0.142 16.67 2.36
Share Capital
(Rs. 90 × 4,000
Share)
10% Debentures 5,60,000 0.222 8.57 1.902
(Rs. 70× 8,000
Shares)
Total 25,20,000 1.0 14.10
So, WACC is 14.10%.
Numerical 13:
The following information is available from the balance sheet of ABC Ltd.
Equity share capital (Rs. 10 per share) Rs. 10,00,000
Retained earnings Rs. 2,50,000
Preference shares (Rs. 100 per share) Rs. 5,00,000

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 Cost of Capital

Debentures (Rs. 100 per debenture) Rs. 5,00,000

-------------------
Total 22,50,000
--------------------
All these securities are currently selling in the market at following prices:
Debentures Rs. 110 per debenture, Preference share Rs. 115 per share and equity share
Rs. 25 per share. Anticipated external financing are:
(a) Rs. 100 per debenture redeemable at par after 20 years .Flotation cost are 4%
and coupon rate of 10%. Sale price Rs.115
(b) Rs. 100 15%Prefrence shares redeemable at 10% premium after 15 years.
Flotation costs 5%. Sale price Rs. 100
(c) Equity shares Rs. 25 per shares with flotation cost of Rs. 2 per share.
The dividend expected on the equity share at the end of the year is Rs. 3 per share; the
anticipated growth rate in dividend is 5%. The corporate tax rate is 40%.
Calculate weighted average cost of capital using
(i) Book value weight
(ii) Market value weight
Solution:
Calculation of specific cost of capital
Cost of Debentures:
Kd = I(1-t) +(RV-NP)/N
---------------------------
(RV+NP)/ 2

Rs. 10(1-.4) + (100-110.4)/20

= ------------------------------------
(100+110.4)/2

6 -.52
= --------- =5.20%
105.2
Cost of Preference Shares:
Kp= PD+(RV-NP)/N Rs.15+(115-95)/15
-----------------------= --------------------
(RV+NP)/2 (115+95)/2
16.333
= -------- = 15.55%
105
Cost of Equity Capital:
Ke = D1/NP + g
=Rs. 3/23 + 5%
=18.04%
Cost of Retained Earnings = D1/NP + g
= Rs. 2/ 25 + 5%
= 13%
(Flotation cost is ignored while calculating retained earnings)

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 Cost of Capital

(i) Calculation of WACC based on Book Value Weights:

Weight (w) (Total of Cost of
Source of Book
Book Value/Respective Capital(k) or W×COC
Capital Value(Rs.)
Book Value) (COC)
Equity Share
10,00,000 0.45 0.1804 0.0811
Capital
Retained
2,50,000 0.11 0.13 0.0143
Earnings
15%
Preference 5,00,000 0.22 0.155 0.0341
Share Capital
10%
5,00,000 0.22 0.52 0.1144
Debentures
Total 22,50,000 1.0 0.14094

So, WACC is (.1409×100)= 14.09%

(ii) Calculation of WACC based on Market Value Weights:
Weight (W)
Cost of
Book (Total of Book
Source of Capital Capital(K) W×COC
Value(Rs.) Value/Respective
or (COC)
Book Value)
Equity Share Capital 20,00,000 0.575 18.04 10.37
Retained Earnings 5,00,000 0.144 13.0 1.87
15% Preference
5,00,000 0.144 15.55 2.23
Share Capital
10% Debentures 4,75,000 0.136 5.20 0.70
Total 34,75,000 1.0 15.17
So, WACC is 15.17%.
Note:
(a) If both issue price and market prices are given for a security, in that case always use
issue price in order to calculate cost of capital
(b) The total market value of the equity share capital has been divided into equity and
retained earnings in their book value ratio)

7: Risk-Return Analysis of Various Sources of Finance:

An investor will supply the fund only when is adequately compensated for supplying his
hard earned money. Therefore risk and return analysis of each source of fund is essential
component of financial decision making. Risk can be defined as variability in the return
from expected return from that security. It means higher the volatility or fluctuations in
the return from the security results in higher risk. If the security provides stable return
over period of time, it is known to be risk free or less risky security for instance interest
on bank deposits or interest on government securities. There is no risk in case of
government securities as the payment is guaranteed by the central or the state
government. An investor will invest in risky securities if he is adequately compensated
for the additional risk taken. For example if the rate of return on company debentures
and bank deposits are same then investor will choose bank deposits as these involve
lesser risk. If the rate of return on corporate debenture are higher than bank deposits,
then investor will have to choose between the either of the two depending upon the risk

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 Cost of Capital

taking capacity and other factors. Thus, the risk and return analysis is of utmost
importance for individual and firms both. The risk and return of various securities can be
shown with the help of a diagram:
Figure 1: Risk Return Trade-off

As it can be seen from the above figure, government securities provides the least return
because it involve least possible risk or sometimes called risk free securities. If investor
is ready to bear additional risk he will be expecting higher return or risk premium for the
additional risk taken. Since equity shareholders are paid at last after paying to lender,
government and preference shareholder, thus the equity share capital appear on the top
of the list implying the most risky capital. As equity shareholders are ready to bear the
highest risk they are compensated for the same as the return is highest in case of equity
capital. Risk and return of other securities can also be seen in the diagram.

Value Addition 3: Know More

Various Sources of Finance
Visit the link below to know about the various sources of finance to
start up business.

Source: https://www.extension.iastate.edu/agdm/wholefarm/html/c5-92.html

8. Factor Affecting Cost of Capital:

As it is already discussed in the present chapter that cost of capital is the minimum
expected rate of return of the supplier of the fund. The expected rate depends on
various factors viz. risk characteristics of the firm, risk perception of the investor and
overall business environment. Following are some of the factors that determine the cost
of capital:
1. Risk Free Interest Rate: It is the interest rate on default free securities or risk free
securities. Generally govt securities are considered as risk free securities as there is no
default on periodic payment or maturity payment by the govt of India.` The cost of
capital is addition of risk free rate and premium for the risk.
2. Financial Risk: Financial risk occurs because of higher payment of fixed financial
charges. Therefore, the use of more and more debt fund by the firm will increase burden
of interest payment and investors will assign higher risk factor to that firm. This risk is
avoidable and can be reduced by effective financing decision making.

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 Cost of Capital

3. Business Risk: It is related to the operating profits of the firms with regards to sales
revenue. This is firm specific risk. Every project has its bearing on the business risk of a
firm. If the firm choose to accept risky projects, then overall risk of the firm will
increase. It will in turn affect future cash inflows of the firm.
4. Other Factors: Other factors that affect the cost of capital is the liquidity and
marketability of the investment. Investors would assign less risk premium for highly
liquid and marketable securities and investments than the less marketable securities.

Value Addition 4: Know More

Determinants of Cost of Capital
Visit the link below to know about the factors determining the firm’s
cost of capital.
Source: http://www.oeconomica.uab.ro/upload/lucrari/920071/33.pdf

Summary:
 The term cost of capital means the cost of the funds being raised by the firm. It
should not be confused with cost in raising the fund.

 Cost of capital is the concept of vital importance in the field of financing decision
making. Long term capital decisions are based on the cost of capital concept.

 Cost of capital plays an important role in deciding the debt component in overall
capital structure of the firm. Debt is cheap source of fund as interest payment on
debt is tax deductible. But debt also increases the financial risk of the firm as it a
fixed charge on the earning of the firm.
 Cost of capital can be used as a tool to measure the performance of top
management. Performance of the management can be judged by comparing the
actual profitability of the project undertaken by the management with cost of
capital of the firm.
 Cost of capital can be used as a tool to measure the performance of top
management. Performance of the management can be judged by comparing the
actual profitability of the project undertaken by the management with cost of
capital of the firm.

 Explicit cost of capital is the actual payment made by the firm to procure the
fund. Implicit cost of capital is the notional cost of capital. It is also called
opportunity cost of capital. Implicit cost of capital does not involve any outflow of
fund.

 Specific cost is the cost of each source of fund used. For example if firm is using
three sources viz. equity shares, debentures and long term loan then respective
cost of these three will be termed as specific cost.

 When the specific cost of each source of finance is combined together it becomes
combined cost or overall cost of capital. It is also known as composite cost or
weighted average cost of capital (WACC).

 Every firm needs to measure its cost of capital accurately and carefully because
all long term investment decisions are taken on the basis of the cost of capital. If
it is not calculated properly than some projects which are not profitable may be
accepted thereby leading to loss of wealth of shareholders.

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 Cost of Capital

 Debt is one of important component of the overall cost of the firm. It plays an
important role. The debt component can significantly increase or decrease the
overall cost of capital (ko) of the firm thereby deciding the fortune of the firm.

 Preference shares enjoy the advantages of both debt and equity capital. As the
name suggest these share holder are paid first while declaring the dividend.

 Equity shares involve an opportunity cost. The equity shareholder supplies the
fund in expectation of dividend and capital appreciation of their share price in the
market. Therefore the cost of equity (ke) can be defined as minimum rate of
return that a company must earn to leave the market price of shares unchanged.

 Dividend plus growth model take into account the growth expected in the
dividends in the future.

 In Price- Earnings approach price of the equity share depends upon the earnings
of the company Earnings include both retained earnings and dividend paid to
shareholders. Therefore this approach assumes that investor capitalize stream of
all future earnings of the firm to calculate the price of the share.

 Retained earnings is that portion of profit which is not distributed to shareholder

as dividend. It is like saving of the shareholders. Though it is argued that retained
earning has no cost but it is not true. Retained earnings always involve
opportunity cost.

 Weighted average cost of capital or overall cost of capital is the sum of product of
weight of each source of fund with their respective cost. The cost of capital of
each component should be calculated on an after tax basis.

 Risk can be defined as variability in the return from expected return from that
security. It means higher the volatility or fluctuations in the return from the
security results in higher risk. If the security provides stable return over period of
time, it is known to be risk free or less risky security for instance interest on bank
deposits or interest on government securities.

 The expected rate depends on various factors viz. risk characteristics of the firm,
risk perception of the investor and overall business environment.

Glossary:
 Net Proceeds: Net proceeds mean the amount recovered at the time of sale of
any share or security. While calculating net proceeds adjustment has to be made
for discount and premium on issue of security as well as any flotation cost on
issue of securities.
 Capital Budgeting Decisions: Capital budgeting decisions basically include
decisions regarding investment in the long term assets of the firm.
 Maturity: It means any future date when any security is to be repaid.
 Flotation Costs: Flotation costs include those costs which are incurred in issuing
the security. These costs may include underwriting commissions,
 P/E: It is an abbreviation of price earning or price earnings ratio. It means
“amount of investment required to earn a rupees in the stock market.” It should
not be confused with EPS viz earning per share which mean amount earned on
one share.
 Trading on Equity: Use of debt in capital structure to produce gain to the
residual owners i.e. equity shareholders.
 Break Even Sales: It is the sales level where there is no profit and no loss to the

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 Cost of Capital

company. Thus, break even sales is the minimum amount of sales needed for
making a profit. If total sales are more than break even sales, it will result into
profit.
 Operating Risk (Business Risk): Basel II defines operating risk as “risk of loss
resulting from inadequate or failed internal processes, people and systems or
from external events.” Thus business risk occurs because of failed internal
management or market conditions which are beyond company control.
 Financial Risk: Financial risk is the risk caused because of existence of fixed
financial payments like interest on debentures or loans. It occurs because of debt
content in capital structure. Higher amount of debt content in capital structure
will results in higher financial risk.
 Optimum Capital Structure: It is a capital structure or range of capital
structure which results in maximum earning to equity shareholders (EPS). It
results because of best mix of debt and equity capital in the overall capital
structure of the firm.

Exercises:
I. Objective Type Questions:
A. State whether the following statements are true or false.
a. Cost of debt is same as the cost of coupon interest rate.
b. Financial risk cannot be controlled by the firm.
c. Government securities involve the highest degree of risk.
d. Since company is not obliged to pay dividend, cost of equity is nil.
e. Retained earnings have no cost as these are internal funds.
f. WACC based on market value weight and book value weight will always be same.
g. Cost of debt requires tax adjustment.
B. Fill in the Blanks:
a. Combined or overall cost of all the sources of finance is also called ……………………
b. ……………………….is the minimum rate of return that should be earned on equity
capital.
c. Cost of retained earnings is ………………………… form of capital cost.
d. Cost of capital can be used as a ………………….for evaluating investment proposals.
e. Cost of debt capital can be obtained either on ………………………or after tax basis.
f. Short cut method of calculating cost of Preference Share capital can be used in
…………………….. Preference shares only.
Answers to Objective Type Questions:
A. a. False; b. falls; c. False; d. False; e. False; f. False; g. True.
B. a. WACC; b. Cost of equity capital; c. Implicit; d. Yardstick/ standard/cut off
rate; e. before-tax basis; f. Irredeemable.
II. Short Answer Type Questions:
a. Define cost of capital.
b. Explain implicit and explicit cost of capital
c. What are basic assumptions for measurement of cost of capital?
d. Write a short not on the following:

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 Cost of Capital

 Target Weight
 WACC
 Cost of Retained Earnings
e. State different approaches to the computation of cost of equity capital.
III. Long Answer Type Questions:
a. What is WACC? Explain the procedure to calculate weighted average cost of capital
taking an example.
b. What are the advantages and disadvantage of using market value and book value
weight in calculation of WACC?
c. Differentiate between specific cost of capital and weighted average cost of capital
giving suitable examples.
d. Differentiate between marginal and target weights. Which one is better and why?
IV. Numerical Questions:
(a)A company has issued 10% debenture (irredeemable) for 2,00,000 Rs. The c ompany
faces 50% tax bracket. Find the cost of debt if the debt is issued at
I. Par
II. Discount of 20%
III. Premium of 10%
Answer (i)5%,(ii)6.25%,(iii)4.5%
(b)A company is planning to raise Rs. 10 lakh by the issue of 15% debentures of Rs. 100
each at 10% discount. The underwriting expense is expected to be 4%. Find out the
cost of debenture in each of the following cases:
I. If denatures are irredeemable
II. If debenture are redeemable at the end of 10 th year at 15% premium. Use
short cut method.
Assume tax rate of 50% in both cases.
Answer (i)8.68%, (ii) 10.28%
(c)A company issued 2000 8% preference shares of Rs. 100 each at a premium of 10%.
These shares are redeemable after 5 years at a premium of Rs. 10 per share. The cost
of issue is Rs. 2 per share. Find out the cost of preference share capital assuming tax
rate of 50%.
Answer Kp= 6.84%
(d)A company has declared a dividend of Rs 5 per share last year and the expected
growth rate in dividend is 8%. Find out the cost of equity capital if the price of the
shares of the company is (i) Rs. 40 and (ii) Rs.50
Answer(i)21.5%, (ii)18.8%
(e)ABC Ltd. Is planning to raise Rs. 1 lakh by issue of 10% preference share of Rs. 10
each at 10% discount. The underwriting expensed is expected to be 2%. Find out the
cost of preference share capital in each of the following cases:
I. If preference shares are irredeemable
II. If preference shares are redeemable at the end of 10 th year at 15%
premium.

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 Cost of Capital

Answer (i)11.33% (ii) 12.48%

(f)Equity share of RML Co Ltd is currently priced at Rs. 50. Dividend expected at the end
of year one from now is Rs.5. The cost of equity for the companies of similar risk class
is 15%. What is expected growth rate?
What would be change in market price of the share if due to adverse conditions in capital
markets the growth rate is revised and scaled down to 3%?
Answer g=5%, MP= 36.58Rs
(g)The following informations are available from the balance sheet of the company:
Equity share capital (8000 shares of Rs. 100 each) 8,00,000
12% Preference share capital 8,00,000
18% term-loan 24,00,000
-----------------
40,00,000
Determine the weighted average cost of capital of the company based on book value
weight. It had been paying dividend at a rate of Rs. 20 per share (g=0). The market
price of the shares is 150 Rs. Income tax is 40%.
Answer WACC =10.47%
(h)XYZ Ltd has the following capital structure:
Equity shares (face value Rs.10 per share) 5,00,000
12% preference shares (Face value Rs. 100 per share) 4,00,000
8% debentures (Face value of Rs. 100 per share) 6,00,000
The company expected to pay dividend of Rs. 2 on equity share at the end of year which
is expected to grow at 5% p.a. Current market price of equity share is Rs. 14. The
preference share and debentures are being traded at 80% and 70% respectively. The
company pays income tax @ 50%.
Compute WACC based on book value and market value weights.
Answer: WACC(Book Value) 12.7%, WACC (Market Value)14.36%

References:
A. Work Cited and Suggested Readings:
1. Khan, M.Y., & Jain, P.K. (2011). Financial Management – Text, Problems and
Cases(Sixth edition):TMH
2. Chandra, Prasanna (2008). Financial Management – Theory and Practice(seventh
edition): TMH
3. Pandey, I.M.,(2010). Financial Management, Vikas Publications
4. Van Horne, James C., John Wachowicz, Fundamentals of Financial Management
,Pearson education.
5. Ross, Stephen A., Westerfield, Randolph and Jeffery Jaffe, Corporate Finance,TMH
6. Srivastava, Rajiv and Anil Mishra, Financial Management, Oxford University Press.
7. Singh, Preeti. Financial Management, Ane Books Pvt. Ltd.
8. Brealey, Richard A.,& Stewart C. Myers, Corporate Finance, Capital Investment
and Valuation, MGH
9. Singh, S. & Kaur, R., (2012) Basic Financial Management, Mayur Paperbacks.

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 Cost of Capital

B. Web Links:
1. Visit the link http://www.accountingtools.com/cost-of-capital to gain an
understanding on the concept of cost of capital.
2. Visit the link http://www.janhar.com/images/PDF/mar11.pdf to know the
significant of cost of capital in Investment decision making.
3. Visit the link http://web.utk.edu/~jwachowi/mcquiz/mc15.html to take a quiz on
the concept of cost of capital.
C. Video Links:
1. Visit the link http://www.investopedia.com/video/play/cost-capital/ to understand
the concept of cost of capital.
2. Visit the link https://www.youtube.com/watch?v=EQZGqlemTv0 to understand
the concept of cost of equity.
3. Visit the link https://www.youtube.com/watch?v=Vdq2jsZwgoo to gain an insight
into the concept of cost of preferred stock and debt.
4. https://www.youtube.com/watch?v=eqklo5TwW14
5. https://www.youtube.com/watch?v=JKJglPkAJ5o
6. https://www.youtube.com/watch?v=46oLXwClvkw

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