How the cost of capital is to be denominated in terms ?
Whether the cost of capital is to be denominated in terms of after tax or before tax. Why it has to be expressed in terms of after tax ? Why not the before tax cost should be taken into consideration?
For appraising the projects, the return of the investments are considered for comparison which are nothing but the resultant of earnings of the firm immediately after the payment of tax. To study the quality of the projects, both factors must be at common at parlance for comparison.
While computing the cost of capital, the cost of specific sources should be to the tune of after tax only in order to have an effective comparison.
Then, the cost of capital is further bifurcated into two categories viz Explicit cost of capital and Implicit cost of capital.
Explicit cost of capital: The discount rate that equates the present value of the cash inflows that are incremental to the taking of the financing opportunity with the present value of its incremental cash outflows.
It is further explained that rate of return of cash flow of the financing opportunity. It normally takes place only at the moment of raising of financial resources.
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