8/12/2019 Classification of Cost of Capital

1/2

Classifcation o Cost o CapitalBY ABEY FRANCISMARCH 30, 2012FINANCIAL MANAGEMEN

!" cost of capital#"fn" as t!" $ini$%$ &at" o &"t%&n a f&$ $%st "a&n on

its in'"st$"nt in o"& to satis( in'"sto&s an# to $aintain its $a&)"t 'al%"* It is t!"

in'"sto&s &"+%i&"# &at" o &"t%&n*Cost of capitalalso &""&s to t!" #isco%nt &at"!ic!

is %s"# !il" #"t"&$inin- t!" p&"s"nt 'al%" o "sti$at"# %t%&" cas! .os* !"

$a/o& classication of cost of capitala&"

1* Historical Cost and future Cost Histo&ical Cost &"p&"s"nts t!" cost !ic! !as

al&"a#( ""n inc%&&"# o& fnancin- a p&o/"ct* It is calc%lat"# on t!" asis o t!" past

#ata* F%t%&" cost &""&s to t!" "p"ct"# cost o %n#s to " &ais"# o& fnancin- a

p&o/"ct* Histo&ical costs !"lp in p&"#ictin- t!" %t%&" costs an# p&o'i#" an "'al%ation

o t!" past p"&o&$anc" !"n co$pa&"# it! stan#a costs* Infnancial

#"cisions%t%&" costs a&" $o&" &"l"'ant t!an !isto&ical costs*

2* Specic Costs and Composite Cost Sp"cifc costs &""& to t!" cost o a

sp"cifc so%&c" o capitals%c! as "+%it( s!a&"s, &""&"nc"

s!a&"s, #""nt%&"s, &"tain"# "a&nin-s"tc* Co$posit" cost o capital &""&s to t!"

co$in"# cost o 'a&io%s so%&c"s o fnanc"* In ot!"& os, it is a "i-!t"# a'"&a-"

cost o capital* It is also t"&$"# as 4o'"&all costs o capital5* 6!il" "'al%atin- a

capital "p"n#it%&" p&oposal, t!" co$posit" cost o capital s!o%l# " as an

acc"ptanc"7 &"/"ction c&it"&ion* 6!"n capital &o$ $o&" t!an on" so%&c" is "$plo("#

in t!" %sin"ss, it is t!" co$posit" cost !ic! s!o%l# " consi#"&"# o& #"cision8

$a)in- an# not t!" sp"cifc cost* B%t !"&" capital &o$ onl( on" so%&c" is

"$plo("# in t!" %sin"ss, t!" sp"cifc cost o t!os" so%&c"s o capital alon" $%st "

consi#"&"#*

3* Average Cost and Marginal Cost A'"&a-" cost o capital&""&s to

t!""i-!t"# a'"&a-" cost o capitalcalc%lat"# on t!" asis o cost o "ac! so%&c" o

capital an# "i-!ts a&" assi-n"# to t!" &atio o t!"i& s!a&" to total capital %n#s*

Ma&-inal cost o capital $a( " #"fn"# as t!" 4Cost o otainin- anot!"& #olla& o

n" capital*5 6!"n a f&$ &ais"s a##itional capital &o$ onl( on" so%&c"s 9not

#i:"&"nt so%&c"s;, t!an $a&-inal cost is t!" sp"cifc o& "plicit cost* Ma&-inal cost is

http://www.mbaknol.com/author/admin/http://www.mbaknol.com/financial-management/classification-of-cost-of-capital/http://www.mbaknol.com/category/financial-management/http://www.mbaknol.com/financial-management/cost-of-capital/http://www.mbaknol.com/investment-management/what-is-investment/http://www.mbaknol.com/financial-management/cost-of-capital/http://www.mbaknol.com/financial-management/cost-of-capital/http://www.mbaknol.com/managerial-economics/discounting-principle-in-managerial-economics/http://www.mbaknol.com/business-finance/business-valuation-using-discounted-cash-flow-method/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/financial-management/financial-management-decisions/http://www.mbaknol.com/financial-management/financial-management-decisions/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/financial-management/capital-sources-for-business-equity-shares/http://www.mbaknol.com/financial-management/capital-sources-for-business-preference-shares/http://www.mbaknol.com/financial-management/capital-sources-for-business-preference-shares/http://www.mbaknol.com/financial-management/capital-sources-for-business-debentures/http://www.mbaknol.com/business-finance/capital-sources-for-business-retained-earnings/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/financial-management/weighted-average-cost-of-capital-wacc/http://www.mbaknol.com/financial-management/weighted-average-cost-of-capital-wacc/http://www.mbaknol.com/financial-management/cost-of-capital/http://www.mbaknol.com/financial-management/weighted-average-cost-of-capital-wacc/http://www.mbaknol.com/financial-management/classification-of-cost-of-capital/http://www.mbaknol.com/category/financial-management/http://www.mbaknol.com/financial-management/cost-of-capital/http://www.mbaknol.com/investment-management/what-is-investment/http://www.mbaknol.com/financial-management/cost-of-capital/http://www.mbaknol.com/managerial-economics/discounting-principle-in-managerial-economics/http://www.mbaknol.com/business-finance/business-valuation-using-discounted-cash-flow-method/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/financial-management/financial-management-decisions/http://www.mbaknol.com/financial-management/financial-management-decisions/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/financial-management/capital-sources-for-business-equity-shares/http://www.mbaknol.com/financial-management/capital-sources-for-business-preference-shares/http://www.mbaknol.com/financial-management/capital-sources-for-business-preference-shares/http://www.mbaknol.com/financial-management/capital-sources-for-business-debentures/http://www.mbaknol.com/business-finance/capital-sources-for-business-retained-earnings/http://www.mbaknol.com/business-finance/sources-of-finance/http://www.mbaknol.com/financial-management/weighted-average-cost-of-capital-wacc/http://www.mbaknol.com/financial-management/weighted-average-cost-of-capital-wacc/http://www.mbaknol.com/financial-management/cost-of-capital/http://www.mbaknol.com/financial-management/weighted-average-cost-of-capital-wacc/http://www.mbaknol.com/author/admin/

8/12/2019 Classification of Cost of Capital

2/2

consi#"&"# $o&" i$po&tant in capital %#-"tin-an# fnancin- #"cisions* Ma&-inal

cost t"n#s to inc&"as" p&opo&tionat"l( as t!" a$o%nt o #"t inc&"as"*