7 Methods for Measuring Cost of Capital
Cost of capital can be defined both from organization’s and investor’s point of view.
From an organization’s point of view, cost of capital is a rate at which an organization raises capital to invest in various projects.
The basic motive of an organization to raise any kind of capital is to invest in its various projects for earning profit. Further, out of that profit, the organization pays interest and dividend to the sources of capital. The amount paid as interest and dividend is considered as cost of capital.
From the investors’ point of view, cost of capital is the rate of return, which investors expect from the capital invested by them in the organization. The calculation of cost of capital is very significant for the management of an organization.
Methods of Calculating Cost of Equity Capital
- Cost of Debt Capital
- Cost of Preference Capital
- Cost of Equity Capital
- Cost of Retained Earnings
- Weighted Average Cost of Capital
- Marginal Cost of Capital