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Cost of captial

Financial Management

In YTM apporach, in the example (given in the pic) Why do we take 80 as cash outflow and balance interest as cash inflow, isn't it actually the opposite.Since when we issue the debentures we are getting money and therefore cash inflow and the interest are to be paid which results in cash outflow. So how come the opposite happen. Can u please explain this ?

Swathi Krishna

CA Final

★ 8K+

11-Jul-20 12:09

432

Answers (4)

Best Answer

Thread Starter

Swathi Krishna

So in exam should we write from investor's perspective

Cost of capital does not change whether it is investor perspective or company perspective. A transaction will happen when a buyer is willing to pay a price that the seller is willing to sell at. Whether you compute A X B or B x A answer is same. Which ever perspective you choose, please follow the logic through the problem.

Sriram Somayajula

Admin

12-Jul-20 11:02

This is made from perspective of a fresh debenture buyer. She spends Rs.80 to buy the debentures - which is outflow. Interest and principal repayment are inflows. Either way you get same answer

Sriram Somayajula

Admin

11-Jul-20 12:43

But we need to find the cost of captial for the company rite

Thread Starter

Swathi Krishna

CA Final

★ 8K+

12-Jul-20 10:28

So in exam should we write from investor's perspective

Thread Starter

Swathi Krishna