UGC NET COMMERCE January 2017(Paper-II) Q35
0. Which of the following statements is not correct?
- Option : C
- Explanation : The cost of capital is the minimum required
rate of return which firm must earn on its
funds in order to satisfy the expectation of its
supplier of funds. If the return from capital
budgeting proposals is more than cost of
capital then difference will be added to wealth
of shareholders.
The concept of cost of capital has a role to play in capital budgeting as well as in finalizing the capital structure for the firm. The cost of capital depends upon the risk free interest rate and risk premium, which depends upon the risk of investment and risk of firm.
The cost of capital may be defined in terms of (1) explicit cost, which the firm pays to supplier, and (2) implicit cost. i.e., opportunity cost of funds to firm. The cost of capital is calculated in after tax terms.
Different sources of funds available to firm may be grouped into Debt, Preference share capital, Equity share capital and retained earning and these sources have their specific cost of capital. However the overall cost of capital of the firm may be ascertained as the weighted average of these specific costs of capital.
