Cost of capital is the minimum rate of return a company must earn before generating value. It is calculated by a business's accounting department to determine financial risk and whether an investment is justified. There are different components that make up a company's overall cost of capital, including the cost of debt, equity, preference shares, and retained earnings. These costs are weighted and combined to calculate the weighted average cost of capital, which is used to evaluate potential investments.

1. Cost of Capital
By: Dr. Riya Singh

2. Cost of capital is the minimum rate of return
or profit a company must earn before
generating value. It’s calculated by a
business’s accounting department to
determine financial risk and whether an
investmentisjustified.

3. Source of Cost of Capital

4. Components of Cost of Capital
• Zero Risk Return
• Premium for the Business Risk
• Premium for the Financial Risk

5. Howto Calculateof Costof Capital
• Computation of Specific Cost of Capital
• Computation of Composite Cost of Capital

6. Computationof
SpecificCostof
Capital
Cost of debt
Cost of preference shares
Cost of equity shares
Cost of retained earnings

7. Computationof
CompositeCostof
Capital
Weighted Average
Cost of Capital
(WACC)

8. CostofEquity
Capital
 Dividend Capitalization Model
Earnings Capitalization Model
Ke = D/P0 Ke = (D/P0)+ g
Ke = E/P0 Ke = (E/P0)+ g

9. Cost of
Preference
Share
 Kp is the cost of preference captal
 D id the beginning dividend
 P0 is the price of the share of stock, if sold
Kp = D/P0

10. CostofDebt
(Irredeemable)

11. CostofDebt
(Reedemable
)

12. Cost of
Internally
Generated
Funds