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FM 29.04.2010
FM 29.04.2010
• Introduction
• Cost of Capital – Meaning, Definition
• Basic assumptions of Cost of Capital
• Importance of Cost of Capital
• Classification of Cost of Capital
* Explicit cost and Implicit cost
* Future and Historical cost
* Specific cost and Combined cost
* Average cost and Marginal cost
• Factors affecting the cost of capital
Cost of Capital
• P1 = Po(1+Ke)- D1
• Computation of the number of new shares to be
issued
m x P1 = I-(X – nD1)
Where m=Number of new shares to be issued
P1 = Price at which new issue is to be made
I = Amount of investment required
X= Total net profit of the firm during the period
nD1 = Total dividends paid during the period
MM Approach – Irrelevancy of Dividend
• Assumptions
– Capital markets are perfect
– Investors behave rationally, as information is available
freely to them and there are no flotation costs and
transaction costs
– There are either no taxes or there are no differences in
the tax rates applicable to capital gains and dividends
– The firm has a fixed investment policy
– Risk or uncertainty does not exist. Investors are able
to forecast future prices and dividends with certainty
and one discount rate can be used for all securities at
all times.
The Indian Money Market