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Cost of Capital by M.hashaam
Cost of Capital by M.hashaam
Presented To: Rizwan Hamid Presented By: M.Hashaam Roll No. : AM552381 Class : MBA (B&F) 4th Semester
Acknowledgment
First of all thanks of Allah who is most beneficent and the most merciful whose blessings are abundant and favors are unlimited. It is my pleasure to acknowledge the guidance and support of my subject Teacher: Mr. Rizwan Hamid for his endless guidance.
An Abstract
Cost of Capital is the marginal cost of raising funds. This cost is important in our investment decision making because we ultimately want to compare the cost of funds with the benefits from investing these funds. Cost of Capital is the companys cost of using funds provided by creditors and shareholders.
Source of Capital
The Cost of Debt The Cost of Preferred Equity The Cost of Common Equity
Cost of Debt
Cost of Debt is the required rate of return on investment of the lenders of a company.
P0 = S
j =1
Ij + P j (1 + kd)j
ki = kd ( 1 - T )
kP = DP / P0
ke = Rj = Rf + (Rm - Rf)bj
ke = kd + Risk Premium*
* Risk premium is not the same as CAPM risk premium
Conclusion
The cost of capital represents the
overall cost of future financing to the firm It is a weighted average of the costs of the various source of funds available It represents the minimum acceptable return from an investment
Recommendations
I will recommend, That firms should calculate betas relative to the world market. If investors throughout the world held the world portfolio, then they can demand the same return from an investment in any where in world.
Thank You