Exclusively discuss component cost of capital

      

Exclusively discuss component cost of capital

  

Answers


Ruth
I. The cost of equity capital
It is the minimum rate of return required on all projects financed by common equity capital so as to
maintain the market value of the shares at the current level. It is the discount rate that equates the
present value of the expected divided to the current price of the shares.

II. Cost of retained earning (kre)
In (kre) There are two sources of common equity capital namely; external and retained earnings. Both are
first provided by the ordinary shareholders and their costs are calculated in the same way. The
only difference is that cost of retained earning does not involve floatation cost.

III. Cost of preference shares.
This is the minimum rate of return required by investors in preference capital. It is the discount
rate that equates the present value of cash inflows expected from the preference shares to the
current market price of the shares.

IV. Cost of debt
This is the minimum rate of return required by the providers of debt finance. It is the discount
rate that equates the present value of cash inflows expected from the debt instrument to the
current market price of the debt security.





NatalieR answered the question on February 9, 2022 at 12:23


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