Phase 2 Individual Project- Financial Management Principals

Phase 2 Individual Project- Financial Management Principals

1 . What does a company 's cost of capital represent , and how is it calculated ? Explain the calculation in detail

Every company needs to raise funds or capital for financing its projects . The cost of capital represents the maximum return that a company must earn on its investments so that the market value of company 's stock or equity does not decrease . In other words , a firm must earn a return on the investments that are financed by the shareholders at a rate which is

equal or more than the rate of return required by equity holders of the firm . Otherwise , if a certain project fails to earn an expected rate of return , there will be a fall in the market value of company 's shares and will also result in reduction of shareholder 's wealth . Therefore , we can say that a firm 's cost of capital is the required rate of return required by a firm from a certain investment so that it can increase the market value of the firm (Scribd .com , n .d

A firm 's cost of capital represents the minimum rate of return required of the investment in order to maintain if not increase the market value of its equity . The cost of capital comprises of two components cost of equity and cost of debt . However , it may include only cost of equity for a firm which is un-geared or has no debt liability in its capital structure...