Cost of equity | Cost of debt | |
Defination | It is the rate of return expected by shareholder's of company who have invested their money into the company | Cost of debt is the interest a company pays on its borrowings |
Method of estimate | [(dividend per share(for next year)/current market price of share]+ growth rate | [Interest(1-tax rate)]/Debt |
Measure of risk | The higher the cost of equity ,the greater will be the risk. | The higher the cost of debt,the greater will be the risk. |
Because to invest in risky project the rate of return will be higher | Because to invest in risky project the rate of return will be higher | |
What will make it change | The expectation of shareholder's will change it(increase or decrease) | The market interest rate will change it (increase or decrease) |
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