problems in determination of cost of capital

Conceptual controversies regarding the relationship between the cost of capital and the capital structure: few are of the opinion that a firm can minimize the WACC and increase the value of the firm by debt financing. Others believe that the cost of capital is uneffected by the changes in the capital structure. Problems with regard to considering the various costs Problems in computing the cost of equity: it is a difficult task to calculate the expected rate of return on equity.

Conceptual controversies regarding the relationship between the cost of capital and the capital structure: few are of the opinion that a firm can minimize the WACC and increase the value of the firm by debt financing. Others believe that the cost of capital is uneffected by the changes in the capital structure. Problems with regard to considering the various costs Problems in computing the cost of equity: it is a difficult task to calculate the expected rate of return on equity. Problems in computing cost of retained earnings: (Opportunity cost of dividends of shareholders is ignored often)

Dear Freind > Problems in determination of cost of capital 1. Conceptual controversies regarding the relationship between the cost of capital and the capital structure: few are of the opinion that a firm can minimize the WACC and increase the value of the firm by debt financing. Others believe that the cost of capital is uneffected by the changes in the capital structure. 2. Problems with regard to considering the various costs 3. Problems in computing the cost of equity: it is a difficult task to calculate the expected rate of return on equity. 4. Problems in computing cost of retained earnings: (Opportunity cost of dividends of shareholders is ignored often) 5. Problems in assigning weights Thanks

**PROBLEMS IN DETERMINATION OF COST OF CAPITAL** i) Conceptual controversy regarding the relationship between cost of capital and capital structure is a big problem. ii) Controversy regarding the relevance or otherwise of historic costs or future costs in decision making process. iii) Computation of cost of equity capital depends upon the excepted rate of return by its investors. But the quantification of expectations of equity shareholders is a very difficult task. iv) Retained earning has the opportunity cost of dividends forgone by the shareholders. Since different shareholders may have different opportunities for reinvesting dividends, it is very difficult to compute cost of retained earnings. v) Whether to use book value or market value weights indetermining weighted average cost of capital poses another problem. Thanks