EMI s Cost of Capital evaluation
By definition Cost of capital is the internal rate of return in an investment that needs to be yield in order for the firm to give a sufficient rate of return to the capital employed. Cost of capital needs to be used correctly as a discount rate. If it’s too high then the firm will probably not meet the required rate and investors will be disappointed. The capital can be either in the form of equity or in the form of debt or a combination of the two which is the most common case. ... The firm’s creditors must have the market interest rate. In order to calculate the cost of capital we need to calculate separately the cost of equity and the cost of debt. Cost of equity capital: There are 2 ways of calculating the cost of equity capital a) The capital asset pricing model CAPM and b) The Gordon growth model. The Gordon growth model cannot be used for the EMI case because this method assumes that a company grows at a constant rate forever; which is not true for a real life company.