From some days , I am thinking to write on the topic cost of capital for MBA students. For MBA students , cost of capital calculation is so important because after their MBA when they will go for practical field in the corporate sector at that place some time it is the need to calculate the minimum rate of return , actually this is cost of capital . I can say it as the cost of capital is rate of return which a company requires from investment in order to increase the value of the firm in the market.
The concept of cost of capital is divided into three aspects.
1st Aspect
Cost of capital is not as such it means the cost of capital is relating to the rate of return which a firm requires to earn from its project
2nd Aspect
It is the minimum rate of return
3rd Aspect
Rate of return due to risk
4th Aspect
The increase in the rate of return is required due to business risk and financial risk
1) Zero level risk
2) Business level risk
3) Financial level risk
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