Cost of capital
Cost of equity shares
Relationship between risk and return
Cost of loan capital
Cost of preference shares
Calculating WACC
Weighted Average Cost of Capital
The market value of the capital rather than the
nominal value is used in calculating the cost of capital.
Different investment opportunities are likely to
have different levels of risk and so the cost of capital for each project
should be adjusted accordingly.
The capital structure of the business is assumed
to remain stable.
Measurement problems related to the use of
weighted average cost of capital include identification of dividend growth rate
to use in the dividend growth model. The effect of financial gearing
What determines the level of gearing?
The capital structure debate
The traditional view of the relationship between levels of borrowing and expected returns
Relationship between the level of borrowing, the cost of capital and business value: the traditional view
The MM view of the relationship between levels of borrowing and expected returns
The capital structure debate
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