q calculation of cost of capitalcalculation of

Question

Q. Calculation of Cost of Capital?

Calculation of Cost of Capital: - Calculation of cost of capital includes:

(A) Calculation of cost of specific sources of finance

(B) Calculation of weighted average cost of capital

Calculation of Cost of Specific Sources of Finance: - It comprises:

(1) Cost of Debt: - A company may perhaps increase the debt in a number of ways. It may perhaps borrow funds from the financial institutions or else public either in the form of public deposits or debentures for a specific period of time at a specified rate of interest. A debenture or bond perhaps issued at par at a discount or at a premium.

Debt may either be irredeemable or else redeemable after a certain period.

(i) Cost of Irredeemable Debt:-

• Cost of Irredeemable Debt prior to tax :- Formula for computing cost of debt before tax is:

                  K_db =  (I / NP )X 100           

K_db = Cost of debt before tax

I = Annual Interest Charges

NP = Net Proceeds from the issue of Debt