The Cost of Capital – A Back Up for Learners

44 Pages Posted: 5 Jun 2021 Last revised: 7 Jul 2021

See all articles by Samithamby Senthilnathan

Samithamby Senthilnathan

International Training Institute; International Training Institute

Date Written: May 27, 2021

Abstract

For investing in profitable ventures, the firms intend to recover the investment made in them. Thus, the determination of the respective cost of capital of a venture can provide a base for making decisions on whether to accept the project profitably. In this context, this paper provides some basic explanations to facilitate the learners of the cost of capital with appropriate exhibits for their easy understanding. This paper primarily attempts to explain and illustrate how the determination of the cost of capital for the investment of equity and debt capitals can be made. Relatively, the use of dividend–price and earnings–price measures, Capital Asset Pricing Model (CAPM), Weighted Average Cost of Capital (WACC), Weighted Marginal Cost of Capital (WMCC), and breaking points of financing sources are also explained meaningfully. Further, in determining the optimum capital budget considering various projects, the use of the investment opportunity curve (IOC) and WMCC is also explained and illustrated. Finally, some of the major problems in determining the cost of capital are presented in brief.

Keywords: Cost of Capital, WACC, WMCC, CAPM, Investment Opportunity Curve, Internal Rate of Return, Hurdle Rate, Opportunity Cost

JEL Classification: G3, G30, G31, G32, H43, M41, O22, Z33

Suggested Citation

Senthilnathan, Samithambe and Senthilnathan, Samithambe, The Cost of Capital – A Back Up for Learners (May 27, 2021). Available at SSRN: https://ssrn.com/abstract=3855165 or http://dx.doi.org/10.2139/ssrn.3855165

Samithambe Senthilnathan (Contact Author)

International Training Institute ( email )

PO Box 6322
Scratchley Road, Badili
Port Moresby, National Capital District
Papua New Guinea

International Training Institute ( email )

PO Box 6322
Scratchley Road, Badili
Port Moresby, National Capital District
Papua New Guinea

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