A Study on Cost of Capital

Abstract

Cost of capital which is used as a financial standard plays a crucial role in capital budgeting decisions. It is the discount rate applied for evaluating the desirability of investment projects. An investment project can be accepted if it has a positive net present value. Besides, financial decisions taken by the management of a firm are appropriately evaluated using the weighted average cost of capital. The cost of capital influences debt policy of a firm. While designing the proportion of debt and equity in the capital structure, a firm aims at minimizing the overall cost of capital. The cost of capital is widely used in deciding about the method of financing at any particular point of time. It plays an important role in dividend decision. Cost of capital is one of the important metrics which decides the amount of investment in current assets. Keeping the importance of cost of capital in corporate finance, the present study has been undertaken covering ten manufacturing companies listed in Bombay Stock Exchange, India. Financial data are collected for 10 years from 2004 to 2013. The results of regression analysis indicate the factors significantly influencing various components of cost of capital.