Question

how are the costs of the individual sources of capital estimated?

Answer 1

Answer-

The costs of individual sources of capital are estimated as  

1) Cost of equity can be calculated by Capital Asset Pricing Model (CAPM) and Dividend Discount model (DDM)

i) As per CAPM method cost of equity

Cost of equity = RFR + Beta x ( Market rate of return - RFR)

RFR = Risk free rate
Beta = Systematic risk

ii) As per Dividend discount model (DDM)

V = D / (1 + r) + P / (1 + r)

V = value of stock
D = Dividend value of stock
P = stock period one period from now
r = estimated cost of equity

2)

Cost of debt evaluation = The cost of debt such as bonds and loans that are raised are used.

3)
Cost of Preferred stock or equity = Dividend price / Stock price

4)

Cost of capital ( WACC) = Wt of equity x  Cost of equity + Wt of debt x cost of debt x ( 1 - tax rate)

WACC = Weighted average cost of capital

Wt of equity = Proportion of equity in capital structure
Wt of debt = Proportion of debt in capital structure