Certainty Equivalent
Yet another common procedure for dealing with risk in capital budgeting is to reduce the forecasts of cash flows to some conservative levels. For example,…
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Evaluation of Certainty Equivalent
The certainty-equivalent approach explicitly recognizes risk, but the procedure for reducing the forecasts of cash flows is implicit and is likely to be inconsistent from…
Risk-adjusted Discount Rate VS. Certainty-Equivalent
The certainty-equivalent approach recognizes risk in capital budgeting analysis by adjusting estimated cash flows and employs risk-free rate to discount the adjusted cash flows. On…
Cost of Debt
A Company may raise debt in various ways. It may borrow funds from financial institutions or public either in form of public deposits or debentures…
Cost of Preference Capital
The measurement of cost of preference capital poses some conceptual difficulty. In case of debt, there is binding legal obligation on the firm to pay…
Cost of Equity Capital
Firms may raise equity capital internally by retained earnings. Alternatively, they could distribute the entire earnings to equity share holders & raise equity capital externally…
Cost of Equity Capital
Firms may raise equity capital internally by retained earnings. Alternatively, they could distribute the entire earnings to equity share holders & raise equity capital externally…
Cost of External Equity
The minimum rate of return which equity share holders require on funds supplied by them by purchasing new share to prevent a decline in existing…
Weighted Average (Cost of Capital)
After calculating costs, they are multiplied by weights of various sources of capital to obtain a weighted cost of capital (WACC). The composite, cost of…
Theories of Capital Structure
Net Income Approach:- The essence of net income approach is that the firm can increase its value or lower the overall cost of capital by…