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                                                                                      4.1





                               COST OF CAPITAL: EQUITY, DEBT, RETAINED EARNINGS
                                        H¡${nQ>b H$s H$m°ñQ>… Bp³dQ>r, S>oãQ>, [aQ>|S> A{Zª½g

                   Q.31. Write a short note on: "Determinants of cost of capital."
                         g§{jßV {Q>ßnUr {b{IE… ''H¡${nQ>b H$s H$m°ñQ> Ho$ {ZYm©aH$''&
                                                           OR
                         What is meant by cost of capital? What are the components of cost of capital? How are
                         they calculated?
                         H¡${nQ>b H$s H$m°ñQ> go ³¶m Ame¶ h¡? H¡${nQ>b H$s H$m°ñQ> Ho$ KQ>H$ ³¶m h¢? CZH$s JUZm H¡$go H$s OmVr h¡?
                                                           OR
                         Define cost of capital. State its significance.
                         H¡${nQ>b H$s H$m°ñQ> H$mo n[a^m{fV H$s{OE& BgH$m ‘hÎd ~VmB¶o&
                                                           OR
                         Write a short note on Cost of Equity Capital.
                         Bp³dQ>r H¡${nQ>b H$s bmJV na g§{jßV {Q>ßnUr {b{IE&

                  Introduction                                n{aM`
                      Cost of Capital refers to the discount rate  H¡${nQ>b H$s H$m°ñQ> go Ame` Cg aoQ> go h¡ Omo ^{dî`
                  that would be used in determining the present  _| àmßV hmoZo dmbo {H$gr g§^m{dV H¡$e BZâbmoO H$m dV©_mZ
                  value of the estimated future cash inflows and  _yë` kmV H$aZo _| Cn`moJ _| bm`r OmVr h¡ VWm `h {ZU©`
                  deciding whether the project is worth under-  H$aZo _| ghm`H$ hmoVr h¡ {H$ àmoOoŠQ> _| YZ bJmZm Cn`wº$
                  taking or not. In  this sense, it is defined as the
                  minimum rate of return that a firm must earn  h¡ AWdm ZhtŸ& Bg àH$ma, `h [aQ>Z© H$m dh {_{Z__ aoQ> h¡
                  on its investment for the market value of the  Omo {H$gr H$ånZr Ho$ {b`o AnZo BÝdoñQ>_|Q> na A{O©V
                  firm to remain unchanged.                   H$aZm Amdí`H$ h¡ Vm{H$ \$_© H$s _mH}$Q> d¡ë`y ~Zr ahoŸ&
                      The  cost  of  capital  to  a  company  is  the  H¡${nQ>c H$s H$m°ñQ> go A{^àm` [aQ>Z© Ho$ Cg {_{Z__
                  minimum rate of return that it must earn on  aoQ> go h¡ Omo H$ånZr H$mo AnZo BÝdoñQ>_|Q> na A{O©V H$aZm
                  its investments in order to satisfy the various
                  categories of investors who have invested their  Amdí`H$ h¡ Vm{H$ BÝdoñQ>g© H$mo CZHo$ Ûmam eo`g©, {S>~oÝMg©
                  funds in the form of shares, debentures or term  `m Q>_© bmoZ _| bJm`o J`o YZ na n`m©ßV [aQ>Z© {_b gHo$Ÿ&
                  loans.  Unless  the  company  earns  this  mini-
                                                              `{X H$ånZr {_{Z__ [aQ>Z© ^r A{O©V Zht H$a nmVr h¡ Vmo
                  mum  rate,  the  investors  will  be  tempted  to
                  pull out of the company, leave aside the thought  BÝdoñQ>g© Cg H$ånZr H$mo N>mo‹S>Zo H$m à`mg H$a|JoŸ& CXmhaU
                  of further capital investment in that company.
                                                              Ho$ {bE, BpŠdQ>r BÝdoñQ>g© ^r AnZo Ûmam br JB© [añH$,
                  For example, equity investors expect a mini-
                  mum return as dividend based on their per-  H§$nZr H$s nyd© Ho$ na\$m°_}Ýg `m AÝ` H§$n{Z`m| Ho$ eo`g© _|
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