How to calculate cost of capital

The rate of return paid to the investor as a fee for providing capital for enterprises that use this capital, the value of its price. For the investor the price of invested capital is the opportunity cost arising from the loss of the ability to use the funds in any other way.

Instruction

1. When calculating the price of capital , find out in the first place, the composition of the funding sources to be considered, as well as those who can not be taken into account. Select the sources of funds for the use of which will not have to pay interest. This is the accounts payable for the payment of goods and services tax obligations. They result from the ordinary activities of the entity and in determining the price of capital not taken into account.
2. Expect the aggregate price of capitalon the basis of each funding source. The cost of capital from the bonds will be determined as follows: = (N x q + (N – P)/n) / ((N + 2 P)/3), where N – nominal bond value; R – the amount received from one bond; Q – value coupon interest rate.
3. When evaluating the cost of Bank credit in mind that the price of capital in this case will be determined by a complete return of the transaction, which depends on cash flow. If the enterprise-the borrower does not incur any additional cost, then the cost of the loan will equal the interest rate. In the presence of any additional costs the cost will increase. But, as practice shows, this difference is small - no more than 1-3 %.
4. When placing of ordinary shares the company also pays for attracting capital. This fee will be the amount of dividends. The cost of this source of Finance you can calculate as follows: = D / Pm (1 – L) + g, where C is the cost of equity capital; P - market price per share (the offering price); D – the value of the dividend paid in the first year, g is growth rate of dividend; L – the rate reflecting the costs of emissions (in relative value).
5. The aggregate price of all capital (all funding sources) you can define by the formula weighted arithmetic mean:SK = Sum (CI x Wi), where CI is the cost of each source of financing; Wi – share of each source in the structure of capital.