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Importance Of Cost Of Capital


Computation of cost of capital is a very important part of the financial management to decide the capital structure of the business concern.

Importance to Capital Budgeting Decision:

Capital budget decision largely depends on the cost of capital of each source. According to net present value method, present value of cash inflow must be more than the present value of cash outflow. Hence, cost of capital is used to capital budgeting decision.

Importance to Structure Decision:

Capital structure is the mix or proportion of the different kinds of long term securities. A firm uses particular type of sources if the cost of capital is suitable. Hence, cost of capital helps to take decision regarding structure.

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Importance to Evolution of Financial Performance:

Cost of capital is one of the important determine which affects the capital budgeting, capital structure and value of the firm. Hence, it helps to evaluate the financial performance of the firm.

Importance to Other Financial Decisions:

Apart from the above points, cost of capital is also used in some other areas such as, market value of share, earning capacity of securities etc. hence, it plays a major part in the financial management.

Importance Of Cost Of Capital Importance Of Cost Of Capital Reviewed by Blog Editor on Sunday, April 23, 2017 Rating: 5

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