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Cost of Capital : Part - 01

Definition about Cost of Capital : Part - 01

Cost of Capital:
"The cost of capital is the rate of return a firm must earn on its investments in project in order to maintain the market value of its." - L. J. Gitman

"Cost of capital is the required rate of return on the various types of financing." - J. C. Van Horne

"Cost of Capital defined as the minimum rate of return that a firm must earn on its investment for the market value of the firm to remain unchanged." - Khan and Jain

The Project Cost of Capital:
"The project cost of capital is the minimum acceptable rate of return on funds committed to the project." - I. M. Pandy

Effective Investment Rate:
"The annual rate of interest actually being earns as opposed to quoted rate." - Bringham and Weston

Privately Owned Firms:
"There is a serious question about how are one." - Weston and Brigham

Historical Costs:
"The historical costs that were incurred in the past in raising capital are not relevant in financial decision making" - M. Pandy

Future Cost:
"It is an obvious fact to state that the relevant cost in the investment decisions is the future cost; that is, the cost that would be incurred if the firm were to raise capital from each source at the present time, or in the near future." - M. Pandy

Explicit Cost:
"The explicit cost of any source of capital is the discount rate that equates the present value of cash inflows that are incremental to the taking of financing opportunity with the present value of its incremental cash out flows." - Khan & Jain

Implicit Cost:
"The return to the second best alternative that is sacrifice for earning the return on the first best alternative." - Van Horne

"Implicit cost is the rate of return associated with best investments opportunity for the firm and its shareholders that would be foregone, if the project under consideration by the firm were accepted." - Khan & Jain

Weighted Average Cost of Capital:
"A firm's weighted cost of capital is a composite of individual cost of financing weighted by the percentage provided by each." - Martin and others

"The target proportions of debt, Preferred stock and common equity, along with the component cost of capital, are used to calculated the firms weighted average costs of capital." - Weston and Brighham

"The cost of each source or component is called specific cost of capital. When these specific costs are combined to arrive at overall cost of capital, it is referred to as the weighted average cost of capital." - Khan and Jain

"The overall cost of capital is weighted average of the individual required rates of return (Costs) for the various instruments with which the firm intends to finance." - Van Horne

Market Value of Weight:
"Market value weights measure the proportion of each type of capital at its market value." - L. J. Gitman

Target Weight:
"Target weights, which can also be based on either book or market values reflect the firms desired capital structure proportions." - L. J. Gitman

"Target capital structure is one which the firm intends to maintain in the long run give its operating conditions and attitude to word risk." - I. M. Pandy

Historical Weight:
"Historical weights, can be either book or market capital structure proportion." - L. J. Gitman

You can also read: Leverage

N.B: You can also read: Cost of Capital : Part - 02


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