Analyse the Cost of Capital

Managerial Finance Student Details [Pick the date] In capital budgeting, the cost of capital is the return required to justify undertaking acapital project, such as the construction of anew factory. In capital budgeting, the cost of capital is the return required to justify undertaking acapital project, such as the construction of anew factory. The term "cost of capital" is typically used by analysts and investors to describe the weighted average of afirm's debt cost and equity cost combined. An indicator of the relative contribution of creditors and shareholders to business capital is the debt-to-equity ratio. Defined simply, adebt-to-equity ratio compares the amount of long- term debt with the amount of equity capital invested in the business. A tool like this one can be used to estimate how much borrowed capital (debt) might be able to be repaid by shareholder contributions. Typically, itis calculated using aprevious fiscal year's data to assess afirm's financial leverage and soundness. As per the data available on the site itis noted that the Healthcare Products is having low debt ratio. The debt ratio of the industry is 9.66% which means the company is mostly depended upon the own equity. Following might be the reasons for low debt ratios: 1. As there is very less investment compared to the other industries. 2. As the business of the healthcare product based on the credit available which means the credit provided in the industry is very high and the company can roll the funds based on the credit available to him and the credit given to customer is very less period so that the funds received from the customer can be utilised for the payment of debtor. 3. There is no requirement of the costly equipment, so that there will be less requirement of the long term funds and the same can be fulfilled by the own capital.