What do you mean by cost of capital explain in lay man term and with example too.
Varun shettyBeginner
What do you mean by cost of capital explain in lay man term and with example too.
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Cost of capital is simply jo ap paise (capital) use karte ho business karne liye..wo arrange karne me apko kuch cost dena padta hai like agar wo apka khud ka paisa hai to uspe anne wala return wo hogai uski cost ya fir loan agar liya hai to uspe jo ap interest doge wo hogai cost..ya manlo mix hai dono ka to fir weights ke proportion leke us hisab se cost kya hogi..
So issi ko cost of capital bolte hai.. imagine ap ek business kar rahe ho..jisme 100 rs lage ge.. ab 40 apne khud ke lagae aur 60 ka debt le liya..debt pe apko 5% interest dena hai aur khud ke paise pe ap expect karte ho ki 10% ayega return. (Imagine tax rate is 20%)
To in paise ko arrange karne ka cost is cost of capital which is 0.6×(0.05×0.8) + 0.4×0.1= 0.064 or 6.4 is your cost to get this much capital to start your business.
I hope it helps.