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The cost of capital depends on the risk of the project, not the source of the money. the sum of outstanding debt, preferred stock, and common equity. 100 each outstanding and the current market price is Rs. (ix) Every source of fund has an explicit cost of capital. 54 0 obj <>stream questions. öÛ@PCäw¯S,u÷=ÜÏÊ$X9öL,j®ä�qÎÁ!ÓyğË'�ôDâÅU:¯ ­"YB%:A_½ƒ>¾�Õ34®iª¬$O Why is it that, for a given firm, that the required rate of return on equity is always greater than the required rate of return on its debt? Weighted Average Cost of Capital The weighted average cost of capital (WACC) is a common topic in the financial management examination. Trecor Co has a target return on capital employed of 20%. Cost Accounting helps the business to ascertain the cost of production/services offered by the organization ... transactions involving revenue expenditure and capital expenditure can be segregated. A d. current yield. (�=88� ��ߓ!�Gg=��:cQ�;/��=�n 8߼ۄS�¨��C}Xc��ˍ�%1F����܂�Z��Y��R� c) The entire share capital of a company consist of 1,00,000 equity share of Rs. A. tax compliance. Capital decisions cannot be reversed at a low cost… Hence, all four elements needed to be considered, and a separate cost and value calculated for each. @P "�V�S`��3`���9pNM�.��Sr�/c�je�˘�n�C2)m����ܦϘ'v��I��|nд*��wdz>!�zԳ��L�u 4. `z�d0�\�3��ue}ک�`pG�������yn�O��G?LJ�Å#Ɖ�,/�o��E�/vʾn�BT��%������}�KO,f�)�R��|Љ���y��R�n9]J�t���o�t�n�Q7~�/��F�W�$ށՓzﹴ/E�4 The Trade-off View of the Cost of Capital EXPLAIN GRAPH A company’s overall cost of capital is a weighted average of the cost of debt and the cost of equity. 25,00,000 by issuing new shares. Cost of Capital Practice Problems 1. [ but the changing the capital structure does change the required rate of return on individual The above WACC is without taking into … Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. The life for each type of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas- powered truck will be $5,000 per year. 43 0 obj <>/Filter/FlateDecode/ID[<73B6D27487F5F04D94A8F6A5D5E8D093>]/Index[38 17]/Info 37 0 R/Length 49/Prev 24812/Root 39 0 R/Size 55/Type/XRef/W[1 2 1]>>stream Trecor Co has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. The ratio which measures the profit in relation to capital employed is known as___ 6 . (a) A company has estimated that the cost of its ordinary share capital is 15%, and the cost of its non-voting preference share capital is 10%. share capital, both, require tax adjustment. 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