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Cost of Capital : Part - 02

Definition about Cost of Capital : Part - 02

Marginal Cost of Capital:
"The weighted average cost of new, or incremental Capital is known as the marginal cost of capital." - I. M. Pandey

"The marginal weights represent the percentage share of different financing sources the firm intends to raise/employ." - Khan & Jain


"The Required rate of return is its overall marginal cost of capital, that is, the cost of an added increment of capital." - Burton A. Kolb


Breaking Point:
"The level of total new financing at which the cost of one of the financing components rises. There by causing an up word shift in the weighted marginal cost of capital." - L. J. Gitman

"The point related to the weighted marginal cost of capital where the amount of capital that will be raised will require that additional common stock be issued. the WAMCC will rise lightly as the firms capital. Requirements exceeds this point." - Burton A Kolb

"The dollar value of new capital that can be raised before an increase in the firm's weighted cost of capital occurs." - Weston and Brigham

Cost of Debt:
Cost of debt is the rate of return expected by the lenders. Generally, this rate is the interest rate specified at the time of debt issue.

Cost of preference share capital:
The cost of preference share capital may be defined as the dividend expected by the preference share holder.

Cost of equity share capital: 
Cost of equity share may be defined as the minimum rate of return that a firm must earn on the equity financed portion of an investment project in order to leave unchanged the market price of the share.

Capital assets pricing model (CAPM):
The CAPM explains the behavior of security prices and provides a mechanism whereby investors could asses the impact of proposed security investment on their overall portfolio risk and returns. In other words, it formally describe the risk return trade off for securities.

Cost of retained earnings:
"The cost of retained earnings may be defined as opportunity cost in terms of dividends foregone by/with held from the equity share holders." - Khan & Jain

⇛ N.B: You can also read: Capital Structure

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