10 Questions
How is the combined cost of capital calculated?
By weighting the cost of each component of capital based on their proportions in the overall capital structure.
What is specific cost of capital?
The cost of each component of capital such as preference shares, debentures, and equity.
What does the average cost of capital refer to?
The weighted average cost of capital.
Define Marginal Cost of Capital.
The cost of raising an additional unit of capital.
How is the Marginal Cost of Capital calculated?
By taking the weighted average cost of additional funds.
What is Historical Cost of Capital?
The cost that has already been incurred for financing a project.
Explain Future Cost of Capital.
It is the expected cost of obtaining funds for financing a project.
Why is Marginal Cost of Capital important for decision-making?
It provides insight into the cost of raising additional funds.
Differentiate between Average Cost of Capital and Marginal Cost of Capital.
Average cost is the weighted average cost of capital, while marginal cost is the cost of raising an additional unit of capital.
How does the specific cost of capital influence financial decisions?
By providing insights into the individual costs associated with different sources of financing.
Test your knowledge on the capital structure planning of a firm including the optimal proportion of debt and equity, as well as capital budgeting decisions. Understand how to minimize the overall cost of capital and manage financial risk effectively.
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