Prestige Institute of Management &

Research

TOPIC: Meaning of cost of capital and Different types of cost

PRESENTED TO: PRESENTED BY:

Dr. AMITABHA MAHESHWARI ABHISHEK SINGH JADON
AKASH SINGH
KANCHAN TYAGI
SACHIN BHADAURIYA
 INTRODUCTION
Understanding the cost of capital

Cost of Capital is the
minimum rate of return
that a company must earn
on its investments to
satisfy its shareholders .
It represents the cost of funds The cost of capital is a crucial
used to finance a business. factor in determining a
company's overall financial
health.
 COST OF EQUITY

UNDERSTANDING THE COST OF EQUITY

Cost of Equity is the return
required by investors who
provide capital to a company
and have no guarantee of their
investment.
It is calculated using the Capital Cost of Equity is the
Asset Pricing Model (CAPM). most expensive
source of capital for
a company.
 COST OF DEBT

UNDERSTANDING THE COST OF DEBT

Cost of Debt is the interest Debt financing is cheaper than Cost of debt is tax-deductible.
rate a company pays on its equity financing.
borrowed funds.
 COST OF WEIGHTED AVERAGE CAPITAL (WACC)

UNDERSTANDING THE WACC

WACC represents the average WACC is calculated by WACC is used to

cost of all capital sources a
company uses to finance its
operations.
multiplying the cost of each
capital source by its relevant
weight and adding them together.
evaluate investment
opportunities and
determine which ones
will create shareholder
value.
 COST OF CAPITAL: EQUITY VS DEBT

COMPARING EQUITY AND DEBT FINANCING

Sources of Advantages Disadvantages
capital
(i) No obligation to repay. (i) Expensive source of capital.

EQUITY (ii) You have less risk with equity. (ii) Your investors will expect and
deserve a piece of your profits
(iii)  Equity financing does not take funds out that’s wht we have to share profit.
of the business. Debt loan repayments take
funds out of the company's cash flow, (iii) Sharing ownership and having
reducing the money needed to finance to work with others could lead to
growth. some tension and even conflict.
Sources of Advantages
capital
(i) Loan interest is tax deductible,
DEBT whereas dividends paid to
shareholders are not.
(ii) Principal and interest payments are the business more likely to have
stated in advance, so it is easier to
work these into the company's cash
flow. 
(iii) Taking out a loan is temporary.
Disadvantages
(i) The company and the owner
must have acceptable credit
ratings to qualify.
(ii) Taking on too much debt makes
problems meeting loan payments if
cash flow declines.
(iii) Principal and interest payments
must be made on specified dates
without fail it might have difficulties
making loan payments. 
THANK YOU