Examine the difference between explicit and implicit cost, Financial Management

Assignment Help:

Examine the difference between Explicit Cost and Implicit Cost

Cost of capital can be either implicit cost or explicit. Explicit cost of any source of capital is the discount rate which equates the present value of cash inflows that are incremental to taking of the financing opportunity with present value of its incremental cash outlay. Hence the explicit cost of capital is the internal rate of return of cash flows of financing opportunity.

A series of each flows are associated with a method of financing. At the instance of acquisition of capital, cash inflow takes place followed by the subsequent cash outflows in the form, of interest payment, payment of dividends orrepayment of principal money. Hence, if a company issues 10 per cent perpetual debentures worth USD 10,00,000, there would be cash inflow to firm of the order of 10,00,00. This will be followed by annual cash outflow of USD. 1,00,000. The rate of discount which equates the present value of cash inflows with present value of cash outflows, would be explicit cost of capital.

 


Related Discussions:- Examine the difference between explicit and implicit cost

Dow jones global index (djgi), Dow Jones Global Index (DJGI) The DJGI a...

Dow Jones Global Index (DJGI) The DJGI aims to cover 95% of market capitalisation at country level. As with FTSE and MSCI, there are the same 23 developed markets, but with gre

Calculate the acid test ratio, FIXED ASSETS                          200 00...

FIXED ASSETS                          200 000                       LONG TERM LIABILITIES CURRENT ASSETS CASH             40 000                       LOAN

Computation of the value of the firm, Q. Computation of the Value of the fi...

Q. Computation of the Value of the firm? The argument given by MM in favour of their hypothesis is that whatever increase in the value of the firm results from the payment of d

Define the term- franchise, Franchise (licensing) - Granting or licensi...

Franchise (licensing) - Granting or licensing of the right to use systems, expertise,brandsknow how etc. to another  organisation,  generally in  return  for  a  profit  share

Objectives of working capital management, What are the objectives of workin...

What are the objectives of working capital management? Briefly explain the various elements of operating cycle.

Bond Valuation, The Pennington Corporation issued a new series of bonds on ...

The Pennington Corporation issued a new series of bonds on January 1, 1979. The bonds were sold at par ($1,000), have a 12 percent coupon, and mature in 30 years, on December 31,

Performance evaluation, Performance evaluation One can determine this b...

Performance evaluation One can determine this by comparing the cash flow from assets and cost of capital. 1. Cash flow from assets Cash flow from assets is calculated

Account balance - inherent risk, Account balance - Inherent risk At a...

Account balance - Inherent risk At account balance / class of transaction level Balances susceptible to misstatement. History of errors. Complexity of transac

State the advantages of ias 14 risk and return approach, IAS 14 "risk and r...

IAS 14 "risk and return approach" Advantages Highlights the profitability, risk and returns of each segment. Information is more comparable with other entities.

Cash flow duration, Cash flow duration, like effective duration, cons...

Cash flow duration, like effective duration, considers the change in the cash flow due to prepayment with the change in the interest rate. In effective duration,

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd