The term cost of capital is nothing but the overall cost of capital which is to be computed to the tune of the proportion of the funds in the mixture; should computed only to the tune of assignment of weights. The weight average cost of capital has its own steps to follow during the process of computation.
The weights are normally classified into two major classification viz
Marginal weights: Assignment of weights to the specific cost by the proportion of the each fund to be raised to the total fund
Historical weights: The weights are assigned to the specific source of fund to the tune of the proportion of the fund in the existing capital structure. This type of historical weight is further classified into two different categories viz:
Market value weights are assigned to the tune of market value to measure the proportion of each type of capital.
A company has on its books the following amounts and specific cost of each type of capital. Determine the weighted average cost of capital using (a) Book value weights and (b) Market value weights.
The determination of the weighted average cost of capital using book value weights
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