Monday, April 17, 2017

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Assumption of Cost of Capital

Assumption of Cost of Capital:

Cost of capital is based on certain assumptions which are closely associated while calculating and measuring the cost of capital. It is to be considered that there are three basic concepts:

finance
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1. It is not a cost as such. It is merely a hurdle rate.

2. It is the minimum rate of return.

3. It consis of three important risks such as zero risk level, business risk and financial risk.

Cost of capital can be measured with the help of the following equation.

K= rj + b + f.

Where,

K = Cost of capital.

rj = The riskless cost of the particular type of finance.

b = The business risk premium.

f = The financial risk premium.

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