Thursday, July 3, 2008

Cost of Capital

Q:- What is cost of capital ?

Ans. The cost of capital is that minimum rate of return which a firm must earn or expected to earn on its investment so as to maintain the market value of its shares .
The cost of capital may be defined as rate of return which a firm requires from investment in order to increase the value of the firm in the market place .
Concept of cost of capital has been classified into three aspects

  1. Cost of capital is not as such , it means the cost of capital is relating to the rate of return which a firm requires to earn from its projects .
  2. It is the minimum rate of return
  3. Rate of return due to risk the increase in rate of return is required due to business risk and financial risk.
  • Zero level risk
  • Business risk
  • Financial risk

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