country
$20 Bonus + 25% OFF
Securing Higher Grades Costing Your Pocket? Book Your Assignment at The Lowest Price Now!

Question:

What is the most important principle to be considered when implementing the cost of capital? Explain in detail with 1 example.

 

Answer:

Important principle to be considered when implementing the cost of capital

The crucial factor in the implementation process of cost of capital is the consistency among the components taken into consideration for WACC and free cash flow.  This needs to be ensured by considering opportunity cost from various origins such as debt, equity and so on. The importance of the security must be weighted in accordance with the market based target weight and the computation process must be done after including corporate taxes. It should be further ensured that the denomination is done in same currency and nominal terms when needed.  (Brealey et al. 2012) 

The capital funding of the company is mainly composed of debt and equity. The cost of debt is referred to as the borrowing of the funds from financial institutions and the interest which is to be paid on the borrowed amount is referred to as cost of debt. The computation of this amount is done by considering the risk free rate of the bond by matching a suitable term structure and added it with the premium amount. The cost of the equity is done on the basis of comparing of similar risk profiles, which is done by implementation of CAPM model. The “Weighted Average cost of capital” is able to predict the return from both equity owners and the debt holders. (Fernandes 2014) 

 

Example:

The weighted average cost of capital in a Warehouse Systems equals 8.4%.  The majority of capital amount is held by equity holders (89.3%); whose “Capital Asset Pricing model” based required return is 8.3%.  The remaining capital amount is borne by debt holders at 1.7% of an “after-tax basis”.

The Cost of Capital: Warehouse Systems

Origin of Capital

Distribution of capital

Cost of capital

Corporate tax rate

After tax opportunity cost

Proportion distributed to weighted average

Debt

10.7

3.8%

35.6%

1.7%

0.6%

Equity

89.3%

8.3%

8.3%

7.8%

WACC

100%

 

 

 

8.4%

 

Reference List

Brealey, R.A., Myers, S.C., Allen, F. and Mohanty, P., 2012. Principles of corporate finance. Tata McGraw-Hill Education.

Fernandes, N., 2014. FINANCE FOR EXECUTIVES: A practical guide for managers. NPVPublishing. 

OR

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2017). The Cost Of Capital. Retrieved from https://myassignmenthelp.com/free-samples/the-cost-of-capital.

"The Cost Of Capital." My Assignment Help, 2017, https://myassignmenthelp.com/free-samples/the-cost-of-capital.

My Assignment Help (2017) The Cost Of Capital [Online]. Available from: https://myassignmenthelp.com/free-samples/the-cost-of-capital
[Accessed 18 February 2020].

My Assignment Help. 'The Cost Of Capital' (My Assignment Help, 2017) <https://myassignmenthelp.com/free-samples/the-cost-of-capital> accessed 18 February 2020.

My Assignment Help. The Cost Of Capital [Internet]. My Assignment Help. 2017 [cited 18 February 2020]. Available from: https://myassignmenthelp.com/free-samples/the-cost-of-capital.


MyAssignmenthelp.com has appointed best assignment experts who are wizards of words. Our writers know every trick of crafting high quality write-ups within a short period. With years of experiences, we have become one of the most prolific assignment help services in the USA. We deliver custom-made help to students with writing different types of assignments. We guarantee total need-based and timely service, and this is why increasing numbers of students prefer to buy assignment online.

Latest Finance Samples

7405ENG Renewable Energy Systems 2

Download : 0 | Pages : 8
  • Course Code: 7405ENG
  • University: Griffith University
  • Country: Australia

Answer: Introduction The project taken for the analysis is located in the Richmond, Australia. The Town or the area is located near the banks of the river. The project location is having a dry climate and the location has a sunny weather too in the period April till September. There are other time period like the month of October when the location receives a very dry and sunny climate. The coordinate for the project is around 20.7 N latitude ...

Read More arrow

BUSM1313: Entrepreneurial Finance System

Download : 0 | Pages : 20
  • Course Code: BUSM1313
  • University: Royal Melbourne Institute Of Technology
  • Country: Australia

Answer: Introduction Social entrepreneurship or entrepreneurial activities are found at the peak in the recent years. The entrepreneurs are considered the lifeblood of the economy. The entrepreneur has the fundamental agent in most of the production, distribution, and growth theories. Entrepreneurs are considered national assets, which is to be refined, motivated, and remunerated to the greatest possible extent. There is a various comparative...

Read More arrow

ACC510 Financial Reporting 11

Download : 0 | Pages : 8

Answer: Introduction In this report, the performance of the company Oil Search will be evaluated in terms of several assets, liabilities, leases and revenues. The company oil search is associated with the business of oil exploration and production in Australia and had recorded a total production of 30.3 million barrels of oil. This company had also managed to increase its net profit by 236% and for this; the net profit of the company is measu...

Read More arrow

ACG 3101 Financial Accounting And Reporting I

Download : 0 | Pages : 10
  • Course Code: ACG 3101
  • University: Florida State University
  • Country: United States

Answer: Introduction: The current paper has been prepared for the purpose of recognising any noteworthy accounting problems that requires to be examined with regards to Myer Holdings Limited. The company is a high-end chain store in Australia trading with varied commodities such as- outfit, accessories, footwear, home ware, fragrance, books, stationery, food and other grocery products (Myer 2018). The study would focus on discovering the proofs...

Read More arrow

MAF760 International Finance 2

Download : 0 | Pages : 13

Answer: Currency Market Overview and Forecast International currency market movement Deriving an accurate prediction of the currency market movements and activities can be extremely difficult given the numerous fluctuations and varied externalities (Salisu, Oyewole, & Fasanya, 2018). Notably, there has been a drastic change in the currency market movements and activities from January 2nd, 2018 to August 31st, 2018. For instance, the...

Read More arrow
Next
watch

Save Time & improve Grades

Just share your requirements and get customized solutions on time.

question
We will use e-mail only for:

arrow Communication regarding your orders

arrow To send you invoices, and other billing info

arrow To provide you with information of offers and other benefits

1,200,215

Orders

4.9/5

Overall Rating

5,060

Experts

Our Amazing Features

delivery

On Time Delivery

Our writers make sure that all orders are submitted, prior to the deadline.

work

Plagiarism Free Work

Using reliable plagiarism detection software, Turnitin.com.We only provide customized 100 percent original papers.

time

24 X 7 Live Help

Feel free to contact our assignment writing services any time via phone, email or live chat.

subject

Services For All Subjects

Our writers can provide you professional writing assistance on any subject at any level.

price

Best Price Guarantee

Our best price guarantee ensures that the features we offer cannot be matched by any of the competitors.

Our Experts

Assignment writing guide
student rating student rating student rating student rating student rating 5/5

154 Order Completed

97% Response Time

Harold Alderete

PhD in Economics

London, United Kingdom

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 4/5

3076 Order Completed

99% Response Time

Emily Wei

Doctor of Philosophy (Ph.D) in Civil Engineering

Singapore, Singapore

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 5/5

610 Order Completed

100% Response Time

Cheryl Zhao

PhD in Statistics

Singapore, Singapore

Hire Me
Assignment writing guide
student rating student rating student rating student rating student rating 5/5

1896 Order Completed

95% Response Time

Herman Berens

MSc in Psychology

London, United Kingdom

Hire Me

FREE Tools

plagiarism

Plagiarism Checker

Get all your documents checked for plagiarism or duplicacy with us.

essay

Essay Typer

Get different kinds of essays typed in minutes with clicks.

edit

GPA Calculator

Calculate your semester grades and cumulative GPa with our GPA Calculator.

referencing

Chemical Equation Balancer

Balance any chemical equation in minutes just by entering the formula.

calculator

Word Counter & Page Calculator

Calculate the number of words and number of pages of all your academic documents.

Refer Just 5 Friends to Earn More than $2000

Check your estimated earning as per your ability

1

1

1

Your Approx Earning

Live Review

Our Mission Client Satisfaction

I\'m really impressed with the way you help me to handle my assignment and with the results. Good job.Thank you. I definitely recommend your services.

flag

User Id: 351207 - 18 Feb 2020

Australia

student rating student rating student rating student rating student rating

Thank you very much. The answer was great. I got a very good grade in my assignment. I hope to deal with u again

flag

User Id: 9262 - 18 Feb 2020

Australia

student rating student rating student rating student rating student rating

Awesome quality of work and presentation 100% satisfied with work and will contact in the future.

flag

User Id: 359998 - 17 Feb 2020

Australia

student rating student rating student rating student rating student rating

it\'s not graded yet but i\'m sure i\'ll receive a very good grade! everything is perfect as described and as submitted! i\'ll surely bring more business to this website!

flag

User Id: 375374 - 17 Feb 2020

Australia

student rating student rating student rating student rating student rating
callback request mobile
Have any Query?