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Basic Assumptions of Cost of Capital
The Cost of Capital is a dynamic concept affected by a multiplicity of economic and firm factors and assumes the following assumptions relating to taxes and risk:
1) Business Risk: It defines the risk of the inability of the firm to cover its operating costs. This cost is assumed to be unchanged that is the firm's acceptance of a given project does not affect its ability to meet operating costs.
2) Financial Risk: It defines the risk of the inability of the firm to cover the required financial obligations (interests, lease payments or preference dividend) is assumed to be unchanged.
3) After Tax Costs: They are considered applicable. The Cost of Capital is calculated on an after tax basis.
4) Capital Structure: The firm's financial structure is assumed to stay fixed.
The securing of the working capital needed for the support of raises in accounts receivable and inventory related with an organizations initial expansion time.
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