The rate of return paid to the investor as a payment for the capital provided represents the value of its price to the enterprise using this capital. For an investor, the price of invested capital is an opportunity cost arising from the loss of the ability to use funds in a different way.
Instructions
Step 1
When calculating the price of capital, first of all, specify the composition of the funding sources that will be taken into account, as well as those that can be ignored. Identify sources of funds for the use of which you will not have to pay interest. These are payables for payment for goods and services, tax liabilities. They arise as a result of the current activities of the enterprise and are not taken into account when determining the price of capital.
Step 2
Calculate the total cost of capital based on each funding source. The cost of capital from the placement of a bonded loan will be determined as follows: Co = (N х q + (N - P) / n) / ((N + 2 P) / 3), where N is the par value of the bond; Р - the amount received from the placement of one bond; Q is the value of the coupon rate.
Step 3
When assessing the cost of a bank loan, keep in mind that the price of capital in this case will be determined by the total profitability of the operation, which depends on the amount of cash flow. If the borrowing company does not incur any additional costs, then the cost of the loan will be equal to the interest rate. If there are any additional costs, its cost will increase. But, as practice shows, such a difference is small - no more than 1-3%.
Step 4
When placing ordinary shares, the company also pays for raising capital. This fee will be the amount of the dividend. You can calculate the cost of this source of financing as follows: С = D / Pm (1 - L) + g, where С is the cost of the share capital; Р - market price of one share (placement price); D is the amount of the dividend paid in the first year; g - dividend growth rate; L is the rate characterizing the emission costs (in relative value).
Step 5
You can determine the aggregate price of all capital (all sources of financing) using the arithmetic weighted average formula: Ck = Sum (Ci x Wi), where Ci is the cost of each source of financing; Wi is the share of each source in the capital structure.
