26-05-2012, 04:42 PM
Cost Of Capital
Group 6 finance ppt.ppt (Size: 1.93 MB / Downloads: 33)
Introduction
The minimum rate of return that a firm must earn on its investment for the market value of the firm to remain unchanged.
Or
The minimum required rate of earning or cut- off rate for capital expenditure
What is Cost of Capital?
When we talk about the “cost” of capital, we are talking about the required rate of return on invested funds
It is also referred to as a “hurdle” rate or “Cut Off” rate because this is the minimum acceptable rate of return
Importance
An Integral part of investment decisions.
Accept-reject criterion
Operational criterion for wealth maximization.
Helpful in evaluation of expansion of projects
Overall Cost Of Capital
Cost of capital means overall composite cost of capital defined as weighted average of the cost of each specific type of fund(WACC).
The overall cost of capital is a weighted average of the various sources. Hence, weighted average.