Types of working capital

The working capital can be classified on the basis of concept and on the basis of time.

 Types of working capital On the basis of concept

Generally there are two concepts of working capital. They are gross working capital and net working capital. But they are defined by different names. They are explained below: Continue reading “Types of working capital”

Working capital management and its concepts

Working capital management

Working capital is also called revolving, circulating or short term capital. Every business require the funds for its establishment which is called fixed capital and require funds to carry out its day to day operations like purchase of raw material, payment of wages etc. which is called working capital. Thus, working capital is the capital required to finance the short term or current assets such as cash, securities, debtors, stock. Continue reading “Working capital management and its concepts”

4 forms of dividend

When dividend is paid out of profit it is called “profit dividend” and when it is paid out of capital it is called “liquidation”. Usually there are 4 forms of dividend.

a) Cash dividend: it is the common method to pay the dividend. Here the shareholders get cash in form of dividend but for this purpose the company must have adequate liquid resources.

b) Scrip or bond dividend: it is the promise made by the company to the shareholders to pay them at future specific date. This form of payment is generally used in case the company doesn’t have sufficient money.

c) Stock dividend: here the company issue bonus share to the existing shareholders. This form of payment is also used in case the company doesn’t have sufficient money.

d) Property dividend: it means payment made to the shareholders in form of property rather than cash.

These are the 4 forms of dividend.

4 types of dividend policy

There are basically 4 types of dividend policy. Let us discuss them on by one:

1.) Regular dividend policy: in this type of dividend policy the investors get dividend at usual rate. Here the investors are generally retired persons or weaker section of the society who want to get regular income. This type of dividend payment can be maintained only if the company has regular earning. Continue reading “4 types of dividend policy”

Divident policy, dividend decisions and valuation of shares

Dividend policy:

Dividend is the part of company’s profit which is given by company to its shareholders. As the shareholders invest their valuable money in the company, so they want to get the maximum return out of it. But in case the company pays the more of its earning in form of dividend than the company has to depend upon the outside resources for its survival. So it is necessary for the growth of the company to pay adequate amount of dividend. Continue reading “Divident policy, dividend decisions and valuation of shares”

Significance of cost of capital

The cost of capital is significant or important due to following reasons

1) Helps in evaluating financial performance: if the actual profit of the project is more than the expectation and the actual cost of capital than the performance is said to be satisfactory.

2) Helps in determining capital mix in capital structure decisions: it is a rule that there should be a proper debt equity mix and the management has to keep in mind that the optimum capital structure results in maximum value of the firm and minimize the cost of capital.

3) Act as acceptance criteria in capital budgeting: If the present value of expected return from the investment is > or = cost of investment the project may be accepted otherwise rejected.

4) Helps in taking financial decisions: it helps in taking financial decisions like dividend policy, capitalization of profits, of working capital.

These are the significance or importance of cost of capital.

Computation or methods of calculating cost of capital

The cost of capital can be calculated by different methods these are discussed as below:

 (I) Computation of cost by specific source of finance

1) Cost of debt: cost of debt means the interest payable on the debentures. For example, if the company issue Rs 40000, 10% debentures at par in that case before tax cost of debt will be Continue reading “Computation or methods of calculating cost of capital”

Cost of capital

The cost of capital is also called hurdle rate or cut off rate. It is the minimum rate of return expected by the investors. The investor’s decision to invest in a particular firm depends upon the cost of capital or cut off rate of that firm which is the minimum rate of return expected by the investors. The firm may use the capital in the form of equity shares, debentures, preference shares and retained earning. In case the firm is unable to achieve the hurdle rate then the market value of the shares will fall. So it is very essential for the firm to achieve minimum rate of return to get wealth maximization.

To conclude cost of capital (KO) is:

  • is not a cost rater it is the rate of return from a particular project.
  • Minimum rate of return
  • Has 3 components – business risk, financial risk, normal rate of return at zero risk level.  KO= B+F+RO

This is the meaning of cost of capital.