capital money

1. Name Roll No.
ISHTIAQ BHATTI 17
BBA (Hon’s) Semester 4th Sec(A)
Submitted To:
Ma’am Sonia

3. Cost of capital
• Cost of capital It is the minimum rate of return
that a firm must earn on its investments
• Shortage of funds

4. Sources of
Capital
Bonds, Bank
loans (Debt)
Preferred
stock
Common
Stock

5. Debt
• Company pays interest to investor (Bond
Holder)
• This interest becomes Cost of Debt (Ki)
• Ki=Kd(1-T) Ki= Cost of debt after tax
Kd= Cost of debt before Tax

6. Preferred Stocks
• Fixed dividend is paid to the stock holder.
• Cost of preferred Stock is represented by (Kp)
Cost Of P.S
Kp = Dp / Po Dp=Dividend on P.S
Po= Purchase Price

7. Common Stock
Dividend is paid to C.S
It becomes cost of Equity/C.S (Ke)
1) Ke = D1 /Po + g
2) CAPM Ke = Rf + (Rm-Rf) B
3) Cost Of Debt before Tax plus Risk Premium
Ke = Kd + RP (RP=Rm-Rf)
Debt financing is cheaper than Equity Financing