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

Discounting the expected cash flows in valuation process, After deter...

After determining the expected cash flows and appropriate interest rate, the last step in the valuation process is to find the total PV of all cash flows. The PV

Why do businesses spend time effort and money, Why do businesses spend time...

Why do businesses spend time, effort, and money to produce forecasts?  Explain. Businesses fail or succeed depending on how well prepared they are to deal with the situations t

Leverage, importance of Leverage

importance of Leverage

Private sector securities - inter corporate investments, Corporates g...

Corporates generally raise funds from the Inter Corporate Deposit (ICD) markets. These instruments generally carry interest rates higher than the other short-term

Capiital budgating, calculate payback period of each project and according ...

calculate payback period of each project and according to payback whice project should be accepted

Describe about permanent working capital, Q. Describe about Permanent Worki...

Q. Describe about Permanent Working Capital? Permanent Working Capital: - The requirement for working capital fluctuates from time to time. Nevertheless to carry on day-to-day

Why do analysts calculate financial ratios, Why do analysts calculate finan...

Why do analysts calculate financial ratios? The comparative measures are known as Ratios. Since the ratios show relative value, they permit financial analysts to compare inform

Fundamentals of structured product engineering, Fundamentals of Structured ...

Fundamentals of Structured Product Engineering 1. (a) Let r m denote the m month swap rate (or Libor rate). Subsequently the 3 × n month forward rate f (3 ×n )

Describe modigliani and miller approach of capital structure, Q. Describe M...

Q. Describe Modigliani and Miller Approach of Capital Structure? Ans. Modigliani as well Miller Approach: - The Modigliani-Miller approach is alike to the net operating income

Financial statement, Telephone service costs the Eggleston Motor Hotel $250...

Telephone service costs the Eggleston Motor Hotel $250 per week. The business pays its phone service bill on the fifteenth day of each month, but it prepares its financial statemen

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