Question

cost capital refers to?

Answer 1

Answer:

Cost of capital refers to the return expected by the providers of funds i.e. shareholders, debt-holders, etc. to the organization for their contribution to the total capital of the organization.

The cost of capital may be implicit or explicit. The cash outflow towards utilization of capital which is clear & obvious is termed as explicit cost of capital while the implicit cost of capital is those cost that does not result in cash outflow but opportunities lost for foregoing better investment opportunities.

Different sources of funds have different types of cost for their capital such as:

• The cost of equity is the return expected by the shareholders, the cost of preference shareholders includes the payment need to be made for the dividend.
• The cost of long-term debts includes the rate of interest need to be paid to the lenders etc.
• The cost of retained earnings is the opportunity cost of dividend forgone by the stockholders.

Each source has its own benefit & limitation & organization should evaluate the best source of finance for their needs as per the cost of capital of each source. The cost of capital plays crucial role in any organization for their expansion & growth.