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Measurement of cost of capital - refers to the cost of each specific source of finance such as:
i. Cost of Equity
This is the rate at which investors discount the expected dividends of the firm to determine
its share value. Conceptually, the cost of equity capital “ is desired as” the minimum rate of return that a firm must earn on the equity financial portion of an investment project in order to leave uncharged the market price of the shares.
Cost of debt
It is measured by the interest rate or the yield paid to bondholders.
Yield to= annual interest payment+ (principal payment – price of the bond)/ no. of years to
maturity)/0.6(price of the bond) + 0.4(principal of the bond)
Kd (cost of debt) =Y (yield) (1-T)
KP (cost of preferred stock) =DP/ (Po-F)
(a)The dividend growth model approaches
(b)Security market line (SML) approaches (Capital Asset Pricing Model (CAPM)
NatalieR answered the question on June 16, 2022 at 13:06
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