ESTIMATING THE COST

OF CAPITAL &
SOURCES OF RAISING
FINANCE
Lavanya Sharma
Akul
Kuldeep Singh
Dev Jain
Anand
 CONTENTS

01 COST OF CAPITAL 02 ESTIMATING THE COST

OF CAPITAL

FACTORS INFLUENCING SOURCES OF RAISING

03 COST OF CAPITAL
04 FINANCE
 WHAT IS COST OF
CAPITAL?
Cost of capital is the minimum rate of return that an organization must earn on its
investments to maintain or increase the value of the company.

To estimate the cost of capital, you need to consider various factors such as the
cost of debt, the cost of equity, and the company's overall capital structure.
 STEPS TO ESTIMATE THE
COST OF CAPITAL
Calculate the cost of debt - The cost of debt refers to the pre-tax interest rate a
company pays on its debts, such as loans, credit cards, or invoice financing. This
information is crucial in helping investors determine if a business is too risky.

Cost of debt =(cost of debt x debt / total capital) x (1 - tax rate)

Calculate the cost of equity - Cost of equity is the rate of return a company must
pay out to equity investors for bearing the risk associated with owning it.

Calculate the weighted average cost of capital (WACC) - The weighted

average cost of capital is the most common method for calculating cost of capital.
It equally averages a company’s debt and equity from all sources.

WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))

 FACTORS INFLUENCING
COST OF CAPITAL
Interest rates - Interest rates are a significant factor that influences the cost of debt.
As interest rates rise, the cost of debt financing increases, which, in turn, increases
the company's cost of capital.

Company's credit rating - The company's credit rating is an important factor in

determining the cost of debt. A company with a high credit rating will typically have
a lower cost of debt financing than a company with a low credit rating.
Market conditions - The supply and demand for capital in the market can also
affect the cost of capital.

Industry and business risk - The risk associated with the company's industry
and business model can also impact the cost of capital.

Capital structure - The proportion of debt and equity in the company's capital
structure can also impact the cost of capital.
 By estimating the cost of capital, you can determine the minimum return
that a company needs to earn on its investments to maintain or increase its
value.

This information can be useful for making investment decisions,

evaluating projects, and determining the cost of capital for the company.
 WHAT IS FINANCING ?

Financing is the process of providing funds for business activities, making

purchases, or investing.

The use of financing is vital in any economic system, as it allows companies to

purchase products out of their immediate reach.
 SOURCES OF FINANCING

Debt financing - Debt financing involves borrowing money from lenders,

such as banks, credit unions, or private lenders, and paying it back with
interest over time. Debt financing can be secured or unsecured.
Equity financing - Equity financing involves raising capital by selling shares
of ownership in the company. This can be done through public offerings,
private placements, or crowdfunding.

Asset-based financing - Asset-based financing involves borrowing against

assets such as inventory, equipment. The lender assesses the value of the assets
and provides funding based on that value.
Grants - Grants are a form of non-repayable funding that can be obtained
from various sources, such as governments, foundations, or corporations.

As each source of financing has its advantages and disadvantages, the best
option depends on the specific needs and circumstances of the organization.

It is important to carefully evaluate the costs and risks of each option before
making a decision.
THANKS!