Accounting 2e 2006 Michael Jones. Chapter 22 ... Accounting 2e 2006 Michael Jones. Cost of Capital I. Cost at which a business raises funds ...
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The Management of Working Capital and Sources of Finance
2.Nature of Sources of Finance
5.Cost of Capital
i. Debtors collection model
Seeks to maintain the optimal level of debtors by
balancing extra revenue from increased sales
with increased costs (e.g., credit control, bad
ii.Economic Order Quantity
Determines optimal order quantity which minimises the costs of ordering and holding stock
Short-Term Financing VIInternal Financing
i. Rights - existing shareholders can buy more
ii. Public - direct offer to public
iii. Placing - place with financial institution
D. Ebt finances her college course as follows:
General expenses, by credit card£3,000 at 25% interest p.a.
Accommodation, by bank loan£4,000 at 10% interest p.a.
Car, by loan from uncle£3,000 at 5% interest p.a.
What is D. Ebts overall weighted average cost of capital?
Source of ProportionCost of Weighted average
Financecapitalcost of capital (WACC)
£ % %
Credit card3,0003025 7.5
Bank loan4,0004010 4.0
Personal loan3,00030 5 1.5
Calculate Costco plc’s weighted average cost of capital.
Source ofMarketProportionCost ofWeighted average
financevalue %capital cost of capital
Equity £2,000,000 66.67 8%* 5.33%
Debt £1,000,00033.33 6%** 2.00%
Helpnote: We need market value not original cost