Cost of Capital and Methods of Charging Interest

Cost of Capital and Methods of Charging Interest

DOI: 10.4018/978-1-5225-3059-6.ch010

Abstract

In the course of running a business, debt and equity are employed in the financing decision. The employment of debt and equity in the financing mix of an enterprise involves costs. The investing farmer should keep track of the cost of capital invested in an enterprise if only to ensure that they do not exceed the returns. It is against this background that this chapter is devoted to the cost of capital ad methods of charging interest. It is concluded that it makes business sense to equip farmers with the knowledge that interest rate on loans is subject to negotiation and that the amount paid as interest on a loan depends on the method adopted in calculating the interest rate. It is recommended that in employing funds for running an enterprise, the farmer should be committed to the obligations of due repayment and also make profits from the borrowed funds.
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Introduction

In the course of running a business, capital items and funds are procured and invested in the business at a cost and for expected return. The cost includes both that of procurement and replacement. The purpose of this chapter is to bring to the investing farmer relevant discussions on the cost of capital and methods of charging interest rate. The chapter focuses on the costs associated with borrowing and the procedures for calculating interest charges. It also attempts to differentiate between cost of capital and cost of funds.

The rest of the chapter is organized as follows: Cost of Capital and its Calculation including Calculation of Debt, Cost of Equity including Calculation of Equity and Calculation of Weighted Cost of Debt, Cost of Funds, Interest Rate, Computation of Interest Rate, Simple Interest Rate, Compound Interest, Interest Rate and Agricultural Productivity in Nigeria. The chapter concludes with recommendations.

Discussions in this chapter benefitted from the ideas obtained from such sources as the following:

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