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

What is usual approach of capital structure, Q. What is usual Approach of c...

Q. What is usual Approach of capital Structure? Ans. Traditional Approach: - The traditional approach establishes middle among the Net Income approach and the Net Operating Inc

Organizational structure of pension funds, Organizational Structure of pens...

Organizational Structure of pension funds In an investment organization such as pension funds, endowments, life and casualty insurance companies, the central bank's investment

Formulation of collection policy, Q. Formulation of Collection Policy ? ...

Q. Formulation of Collection Policy ? Formulation of Collection Policy:- The third characteristic of the receivable management is to formulate a collection policy. Collection p

Globalization of financial markets, Floria Scarpia believes that many of he...

Floria Scarpia believes that many of her clients could benefits from using international investments to diversify their portfolios but many are reluctant to invest abroad -especial

Advantages of trade credit, Q. Advantages of Trade Credit? i) Easy Avai...

Q. Advantages of Trade Credit? i) Easy Availability: Unlike other sources of finance, trade credit is relatively easy to obtain. Except in the case of financially very unsou

Financial objectives of the organisation, A brief scenario for each of two ...

A brief scenario for each of two different organisations is presented. You are advised to read both scenarios before answering the questions that follow. Use the scenario details t

#titleEvaluate alternative hedging strategies, Peak Inc. needs to order Can...

Peak Inc. needs to order Canadian raw materials to use in its production process. The Canadian exporter typically invoices Peak in Canadian dollars. Assume that the current exchang

Determine finance growth and evolution, a) Debentures are a source of exter...

a) Debentures are a source of external long term (loan) finance for which interest is paid to the debenture holder. Debenture holders do not usually have voting or ownership rights

Analysis of capitalization, You must analyze how the company is financed th...

You must analyze how the company is financed through equity and debt financing. You will discuss the level of leverage and how it compares to similar companies in the Industry.

Determine a legal factors which could restrict a corporation, Are there any...

Are there any legal factors which could restrict a corporation in its effort to pay cash dividends to common stockholders?  Explain. A firm might be legally restricted as to the

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