Computation Of Cost Of

Capital
1. Cost of specific Cost of specific source of
finance
 Cost of debt
 Cost of preference
capital
 Cost of equity share capital
 Cost of retained earnings

2. Weighted Average Cost of Capital

 Marginal Cost of capital
 CAPM (Capital Asset Pricing
Model)
(based on cost of equity)
 Cost of debt
The cost of debt is the rate of interest payable on debt
Debenture issued at par (before tax cost of capital )

Kdb = I/P x 100 (%)

In case of premium,

Kdb = 1/N.P x 100 (%)

Where, P = Amount of proceeds received from the issue and not

the face value of securities
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Now, when debt is used as a source of finance, firm saves on
payment of tax as a interest is allowed as a deductable espense
thus, cost of debt is reduced.
So, After – tax cost of debt

Kda = Kdb ( 1 – t )

PBIT = Revenue – cost

Cost of Redeemable Debt :- (a) Before Tax

 (b) After Tax

Before tax = Kdb = I + 1/n (R.V – N.P)

½ (R.V + N.P)
Where, I = annual interest
n = number of years in which debt is to be redeemed
R.V = redeemable value of debts
N.P = net proceeds of debenture

After tax = Kda = I (1 – t) + 1/n (R.V – N.P)

½ (R.V +N.P)
Where, t = tax rate