International Journal of Advanced and Applied Sciences
Int. j. adv. appl. sci.
EISSN: 2313-3724
Print ISSN:2313-626X
Volume 3, Issue 8 (August 2016), Pages: 108-119
Title: A review on the calculation of cost of capital
Authors: E. Chuke Nwude *
Affiliation(s):
Department of Banking and Finance, Faculty of Business Administration, University of Nigeria Nsukka, Nsukka 410001, Nigeria
http://dx.doi.org/10.21833/ijaas.2016.08.016
Abstract:
As cost of capital is generally accepted as an essential element of investment appraisal, its calculation must be undertaken with care and failure to do so could lead to adverse consequences for the business. When one examines some standard financial management textbooks treatments of how to calculate cost of capital from the firms’ perspectives, one finds apparent inconsistencies and, sometimes, outright errors. Many models to find the cost of capital has been developed and applied in several situations in the operations of firms. Consequently, this study examined cost of capital, the latest definitions and latest conceptions surrounding it. Archival research was adopted. It was confirmed that since the short term debts are temporary and offset by cash and marketable securities held by the firm they are excluded from computation of cost of capital. The findings indicate that there different methods of computing the constituents parts of cost of capital as the need of the situation on ground warrants. However, in computing the weighted cost of debt capital any method that includes the conversion of debt before-tax, kd to cost of debt after-tax, kd(1 - T) is accurate. Likewise the overall cost of capital is the weighted average cost of all the sources of funds that form the capital structure of the firm. This conforms to what obtains in more recent studies on measurement of cost of capital.
© 2016 The Authors. Published by IASE.
This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
Keywords: Cost of equity, Cost of preference stock, Cost of debt, WACC, After-tax cost of capital, Before-tax cost of capital, Capital structure
Article History: Received 10 May 2016, Received in revised form 5 September 2016, Accepted 15 September 2016
Digital Object Identifier: http://dx.doi.org/10.21833/ijaas.2016.08.016
Citation:
Nwude EC (2016). A review on the calculation of cost of capital. International Journal of Advanced and Applied Sciences, 3(8): 108-119
http://www.science-gate.com/IJAAS/V3I8/Nwude.html
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