What is the Cost of Equity? Provide a definition, and suggest least one way that we can estimate it. How does this measure reflect risk, and what will make it change? b. What is the Cost of Debt? P...
- What is the Cost of Equity? Provide a definition, and suggest least one way that we can estimate it. How does this measure reflect risk, and what will make it change?
- b. What is the Cost of Debt? Provide a definition, and suggest least one way that we can estimate it. How does this measure reflect risk, and what will make it change?
Homework Answers
| Cost of equity | Cost of debt | |
| Defination | It is the rate of return expected by shareholder's of company who have invested their money into the company | Cost of debt is the interest a company pays on its borrowings |
| Method of estimate | [(dividend per share(for next year)/current market price of share]+ growth rate | [Interest(1-tax rate)]/Debt |
| Measure of risk | The higher the cost of equity ,the greater will be the risk. | The higher the cost of debt,the greater will be the risk. |
| Because to invest in risky project the rate of return will be higher | Because to invest in risky project the rate of return will be higher | |
| What will make it change | The expectation of shareholder's will change it(increase or decrease) | The market interest rate will change it (increase or decrease) |
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