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COST OF CAPITAL






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Management of cash balances

Cash is most important factor in financial management. Every activity in an enterprise revolves round the cash.

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Importance of working capital Management

The importance of the management of working capital can be judged from the following facts

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Objectives of Working Capital Management

Three are two-fold objectives of the management of working capital.

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Meaning of Working Capital Management

Working capital means current assets such as cash, accounts receivables and inventory etc. The management of working capital or current assets is as important as or rather more, important than the management of fixed assets because the fate of most of the businesses very largely depends upon the manner in which their working capital is manged.

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Management of working capital

There are two types of assets in each concern i.e., fixed assets and current assets. Both types of assets are to be manged efficiently so as to earn maximum profit with minimum possible investments because maximization of profits is the prime object of every business.

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Determining the Type of Capital Structure

The next step or the problem in calculating the weighted average cost is the selection of capital structure from which the weights are obtained.

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Computation of Weights

he assignment of weights to specific sources of funds is a difficult task Several approaches are followed in this regard but two of them are commonly used, i.e., Book-value approach and Market value approach.

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Weighted Average, How to Calculate ?

Though the concept of weighted average cost of capital is very simple, yet there are so many problems in the way of its calculations.

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Meaning of Weighted Average Cost of Capital

A company has to employ owner's funds as well as creditors' funds to finance its project so as to make the capital structure of the company balanced and to increase the return to the shareholders.

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Meaning of Cost of Retained Earnings

The company is not to pay any dividends on retained earnings, it is therefore, observed that this source of finance is cost free.

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Mode of Measuring Cost of Capital

In making investment decisions, cost of different types of capital is measured and compared. The source, which is the cheapest is chosen and capital raised.

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Relevant Costs

The following costs are relevant costs, closely associate3d with the problem of cost of capital

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Importance of Cost of Capital in Decision Making

The concept of cost of capital is a very important concept in financial management decision making. The concept, is however, a recent development and has relevance in almost every financial decision making but prior to that development, the problem was ignored or by-passed.

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Meaning of Cost of Capital

Cost of capital is a decisive factor in financial decision-making. W measure and compare the cost of capital in deciding the capital structure of the company so as to earn a fair return to the owner an at least a fair return to the contributors.

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