ENGL291 Lecture Notes - Lecture 5: Fixed Cost, Tax Bracket, Retained Earnings

• School: University of Waterloo
• Department: English
• Course: ENGL291
• Professor: unknown

Document Summary

The cost of capital is an important factor in formulating a firm"s capital structure. Now a days cost of capital is used as the very basis of capital budgeting decision and to evaluate the alternative sources of capital. There are two school of thought have emerged having basic differences on the relevance of the concepts but both concepts are based on optimal policy. One school of a thought is of the opinion that the cost of capital of a firm is constant and it is quite independent of the method and the level of financing. The other view is that cost of capital varies with the method of and level of financing. "the cost of capital is the minimum required rate of earnings or the cut off rate of capital expenditures". Uses of cost of capital in financial decision making: capital budgeting decision: Cost of capital may be used as the measuring tool for adopting an investment proposal.