(151)---DETERMINING COMPONENT COSTS OF CAPITAL

Determining Component Costs of Capital

Generally, the component cost of a specific source of capital is equal to the investors’ required rate of return, and it can be determined by using equation present above post. But the investors’ required rate of return should be adjusted for taxes in practice for calculating the cost of a specific source of capital to the firm. In the investment analysis, net cash flows are computed on an after tax basis, therefore, the component costs, used to determine the discount rate, should also be expressed on an after tax basis.

In our next posts we covered,

• Cost of debt
• Cost of equity capital
• Cost of preference capital
• Weighted average cost of capital