![CALCULATION OF COST OF
IRREDEEMABLE DEBT CAPITAL
Kd = [ i / NP ] *100
Where , i = interest
NP = Net Proceeds](https://image.slidesharecdn.com/costofcapitalppt-170801123402/85/Cost-of-capital-ppt-7-320.jpg)
![EARNING YIELD METHOD :
Ke = ( EPS / MPS ) *100
Where , Ke = cost of equity share capital
MPS = Market price per share
EPS = Earning per share
DIVIDEND YIELD + GROWTH METHOD :
Ke = [ ( DPS /MPS or NP )*100 ] + G
Where , G = growth rate
NP = Net Proceeds
MPS = Market price per share
DPS = Dividend per share](https://image.slidesharecdn.com/costofcapitalppt-170801123402/85/Cost-of-capital-ppt-13-320.jpg)
Cost of capital ppt
- 2. DEFINITION “The cost of capital is the minimum required rate of earnings or the cut-off rate of expenditure.” -Solomon Ezra It is required rate of return on invested funds.
- 3. Significance of cost of capital Helpful in capital budgeting Helpful in capital structure decisions Helpful in evaluating the financial performance Basis for other financial decisions like dividend policy, working capital decisions, etc.
- 4. Cost Of Debt (Kd) Cost Of Preference Shares (Kp) Cost Of Equity Shares (Ke) Cost Of Retained Earnings
- 5. COST OF DEBENTURES •It may be defined as the returns expected by the potential investors of debt securities of the firm. •It is Represented by Ke Or Cd. •It is calculated as before tax cost.
- 6. CALCULATION OF COST OF REDEEMABLE DEBT CAPITAL Kd = i + { MV – NP }/n { MV + NP } / 2 Where , i = Interest MV = Maturity Value NP = Net Proceeds n = Number of years to maturity *100
- 7. CALCULATION OF COST OF IRREDEEMABLE DEBT CAPITAL Kd = [ i / NP ] *100 Where , i = interest NP = Net Proceeds
- 8. COST OF PREFERENCE SHARE CAPITAL •Cost of preference share capital is in terms of the fixed rate of dividend. •It is calculated as after tax cost . •PREFERENCE SHARE Redeemable Preference Share Irredeemable Preference Share
- 9. COST OF REDEEMABLE PREFERENCE SHARE CAPITAL Kp = PD + ( MV – NP ) / n ( MV + NP ) / 2 *100 Where , PD = Preference Dividend MV = Market Value NP = Net Proceeds
- 10. COST OF IRREDEEMABLE PREFERENCE SHARE CAPITAL Kp = ( PD / NP ) * 100 Where , PD = Preference dividend NP = Net Proceeds
- 11. COST OF EQUITY • It is the annual rate of return that an investor expects to earn when investing in shares of a company. It is denoted by ke. •There is no commitment to pay equity dividend •It is the sole discretion of the Board of Directors to pay or not pay dividend or to decide at what rate the dividend be pay to the equity shareholders.
- 12. CALCULATION OF COST OF EQUITY SHARE CAPITAL Ke = ( DPS / MPS ) * 100 Ke = cost of equity share capital DPS = Dividend per share MPS =Market price per share DIVIDEND YIELD METHOD :
- 13. EARNING YIELD METHOD : Ke = ( EPS / MPS ) *100 Where , Ke = cost of equity share capital MPS = Market price per share EPS = Earning per share DIVIDEND YIELD + GROWTH METHOD : Ke = [ ( DPS /MPS or NP )*100 ] + G Where , G = growth rate NP = Net Proceeds MPS = Market price per share DPS = Dividend per share
- 14. COST OF RETAINED EARNINGS •It is the opportunity cost of foregone dividends. It is represented by kr. •The earnings to be retained are already after tax. •Cost of retained earnings (Kr) = cost of equity share capital (Ke)